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INTRODUCTION 


TO 


ECONOMICS 


BY 


HENRY  ROGERS  SEAGER 

Tio/essor  of  Tolitical  Economy  in  Columbia  University 


THIRD  EDITION.  REVISED  AXD  ENLARGED 


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NEW  YORK 

HENRY 

HOLT  AND 

1907 

COMPANY 

Copyright,  1904,  1905 

BY 

HENRY   HOLT  AND   COMPANY 


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THE    QUINN    &    BODEN    CO.    PRESS 
RAIIWAY,    N.     J. 


PREFACE    TO    THE    FIRST    EDITION 

The  presentation  of  economics  to  college  classes  is  a  task 
of  no  little  difficulty.  If  lectures  are  depended  upon  exclusively, 
much  time  must  be  wasted  in  imparting  information  that  could 
be  acquired  more  quickly  and  more  surely  from  the  printed 
page.  On  the  other  hand^  exclusive  reliance  on  a  text-book 
results  in  narrowness  and  dogmatism  on  the  part  of  both 
teacher  and  student.  A  combination  of  the  lecture  and  text- 
book methods  offers  a  means  of  escape  from  these  difficulties, 
but  to  make  this  satisfactory,  a  text-book  especially  designed  for 
the  purpose  must  be  used.  Such  a  book  should  contain  not 
only  the  information  needed,  but  a  systematic  exposition  of 
economic  principles,  intended  to  introduce  rather  than  to  ex- 
haust each  topic  considered.  It  need  not  be  elementary  because 
the  lectures  which  supplement  it  may  be  relied  upon  to  clear  up 
difficulties.  On  the  other  hand,  it  ought  to  give  some  account 
of  the  development  of  economic  theories  and  of  the  views  of 
the  writers  who  have  contributed  most  to  this  development. 

In  writing  the  following  treatise,  I  have  tried  to  keep  these 
considerations  constantly  in  mind.  The  principal  feature  which 
distinguishes  it  from  other  college  text-books  is  its  full  treat- 
ment of  the  subject  of  distribution.  This  is  the  part  of  the 
study  which  is  of  greatest  interest  and  importance ;  yet  it  is  the 
part  most  neglected  in  current  manuals.  Experience  as  a 
teacher  leads  me  to  think  that  the  difficulty  of  making  the  laws 
of  distribution  intelligible  is  exaggerated.  Even  if  it  were  not, 
I  should  still  consider  a  serious  effort  to  instruct  a  class  in  these 
laws  a  most  valuable  exercise  in  economics.  In  the  following 
pages  I  have  tried  to  explain  the  productivity  theory  of  dis- 
tribution and  have  made  free  use  of  the  writings  of  my  hon- 
oured colleague.  Professor  Clark,  who  has  contributed  so  much 
to  an  understanding  of  the  subject.  The  fact  that  I  still  cling  to 
a  modernised  Ricardian  theory  of  rent,  despite  his  criticisms  of 

iii 


S7 


iV  Preface 

that  doctrine,  and  that  I  employ  a  somewhat  different  method 
for  measuring  the  productiveness  of  labour  and  capital,  does 
not  lessen  in  the  least  my  obligations  to  him.  While  making 
prominent  the  laws  of  competitive  distribution,  I  have  tried 
not  to  neglect  the  influence  on  actual  distribution  of  monopoly, 
and  have  devoted  four  chapters  to  different  phases  of  the 
monopoly  problem. 

Another  distinctive  feature  of  the  book  is  the  introductory 
sketch  of  the  rise  and  progress  of  modern  industry  in  England 
and  the  United  States.  These  chapters  are  designed  to  sug- 
gest the  historical  perspective  so  necessary  to  the  judicial 
treatment  of  contemporary  problems  and,  incidentally,  to 
present  some  of  the  industrial  facts  which  must  otherwise  have 
been  deferred  to  later  portions  of  the  book.  To  secure  space 
for  this  innovation,  I  have  been  compelled  to  omit  the  discussion 
of  government  revenues  and  expenditures  usually  contained  in 
manuals  of  economics.  I  have  done  this  the  more  willingly 
because  within  the  last  few  years  as  many  as  three  excellent 
treatises  on  public  finance  have  appeared  as  fruits  of  American 
scholarship. 

The  bibliographical  note  at  the  end  of  Chapter  III.  and  the 
references  for  collateral  reading  appended  to  most  of  the  chap- 
ters have  been  added  for  the  guidance  of  general  readers. 
Asterisks  (*)  have  been  used  to  distinguish  the  works  that 
are  especially  recommended. 

So  many  and  various  are  the  obligations  to  other  writers 
of  which  I  am  conscious,  that  a  detailed  acknowledgment  is 
out  of  the  question.  I  cannot,  however,  refrain  from  recording 
my  special  debt  to  my  former  teacher  and  colleague.  Professor 
Patten,  of  the  University  of  Pennsylvania.  To  his  wholesome 
distrust  of  accepted  opinions,  so  ably  communicated  to  his 
students,  I  owe  more  than  I  can  express.  I  must  also  ac- 
knowledge my  indebtedness  to  Professor  Marshall's  standard 
treatise  and  to  the  works  of  Finance  Minister  von  Bohm- 
Bawerk. 

Among  those  who  have  read  portions  of  my  manuscript, 
Professor  J-  F.  Johnson  of  New  York  University  has  put  me 
under  special  obligations  by  his  criticisms.  Any  merit  which 
may  attach  to  the  chapters  on  money  and  credit  is  largely  due 


Preface  v 

to  him.  My  manuscript  has  also  been  improved  by  the  sug- 
gestions and  criticisms  of  my  colleague,  Dr.  A.  S.  Johnson, 
and  to  him  my  thanks  arc  due  for  that  most  trying  service 
which  friendship  can  command,  the  correction  and  revision  of 
my  proof.  Greatest  of  all  is  my  indebtedness  to  my  wife,  who 
has  helped  me  at  every  stage  of  the  work. 

Columbia  University,  New  York, 
Decern der  /j,  igoj. 

PREFACE    TO    THE    THIRD    EDITION 

The  principal  change  which  has  been  made  in  this  edition 
is  the  addition  of  two  new  chapters.  Several  instructors  who 
have  found  the  book  adapted  in  other  respects  to  their  require- 
ments have  expressed  regret  at  the  omission  of  the  entire  sub- 
ject of  public  finance.  To  remedy  this  defect  the  chapters  on 
Government  Expenditures  and  Government  Revenues  and  on 
Taxation  and  Tax  Reform  in  the  United  States  have  been  in- 
serted just  before  the  concluding  chapter. 

Another  important  change  is  the  complete  revision  of  the 
chapter  on  Production  and  Distribution.  As  the  introduction 
to  the  somewhat  difficult  sections  on  distribution  which  follow, 
this  chaper  has  an  important  role  to  play.  I  hope  that  in  its 
amended  form  it  may  prove  more  satisfactory  both  to  teachers 
and  students. 

Among  the  numerous  other  changes  and  corrections  that  have 
been  made  in  the  text,  two  only  require  special  mention.  The 
statement  of  the  law  of  diminishing  returns  as  it  applies  to 
labour  and  capital  (§72),  has  been  made  to  harmonise  with 
the  statement  of  the  same  law  for  land  (§64).  The  verbal 
inconsistency  involved  in  the  presentation  of  this  important 
principle  in  the  earlier  editions  was  a  source  of  confusion  which 
is  now  removed.  The  other  change  is  the  omission  of  the  sec- 
tions (§§287  and  288  in  the  former  editions),  in  which  a 
novel  plan  for  combining  a  local  land  tax  with  a  state  inheri- 
tance tax  was  advocated.  Further  consideration  has  convinced 
me  that  the  plan  calls  for  fuller  explanation  than  is  possible  in 
a  general  text-book,  and  has  also  made  me  less  confident  of 
its  practicability. 


vi  Preface 

Since  this  book  was  first  printed  there  has  been  unusual 
activity  in  the  publication  of  works  on  economics  in  the  United 
States.  While  it  has  not  been  possible  to  refer  to  these  in  the 
text,  I  have  tried  to  add  all  of  the  more  important  recent  titles 
to  the  References  for  Collateral  Reading  appended  to  most  of 
the  chapters. 

Helpful  suggestions  to  aid  in  the  revision  of  the  book  for 
this  edition  have  come  to  me  from  many  quarters,  and  I  am  glad 
to  have  this  opportunity  to  make  general  acknowledgment  of 
my  obligations.  Especially  valuable  has  been  the  assistance  of 
Professor  Roswell  C.  McCrea  of  Bowdoin  College,  who  devised 
the  improved  diagram  which  appears  in  Chapter  IX. 

Jaffrey,  New  Hampshire, 
September  30,  igo^. 


PAGE 


CONTENTS 

CHAPTER  I 

The  Rise  of  Modern  Industry  in  England 

Economics  Defined— Its  Relation  to  other  Sciences— Politics  and 
Law — History — The  Manorial  System — Manorial  and  Modern 
Systems  Contrasted — The  Guild  System — Merchant  Guilds^ 
Craft  Guilds — Change  from  Local  to  National  Regulation — 
The  Black  Death — Enclosures — The  New  System — Contrib- 
uting Causes — The  National  System — Debasements  of  the 
Coinage — Statute  of  Apprentices — Monopolies — The  Mercan- 
tile System — The  Industrial  Revolution — Mechanical  Inven- 
tions —  Spinning  —  Weaving  —  Steam  Transportation  —  The 
Laisscc-faire  Policy  —  Abolition  of  Restrictions  —  Rise  of 
Factory  System — Effects  of  Factory  System — Conclusion,'        .       i 

CHAPTER   n 
The  Industrial  Expansion  of  the  United  States 

Colonial  Period — Liberty,  Private  Property,  and  Equality — Slave 
vs.  Free  Labour — The  National  Industrial  Ideal — Physical 
Characteristics  of  the  United  States — The  Atlantic  Seaboard 
— The  Middle  West — The  Far  West — The  New  Possessions- 
Development  of  Transportation  Facilities — Growth  of  Railroads 
— Crossing  the  Continent — Increase  in  Traffic — Growth  of  Pop- 
ulation— The  Foreign  and  Native  Born — The  Distribution  of 
the  Population — The  Negroes — The  Foreign-Born — Concen- 
tration of  Population  in  Cities — Agricultural  Development  of 
the  United  States — Invention  of  Improved  Implements — 
Recent  Changes — Principal  Agricultural  Products  of  the 
United  States — Corn— ^Hay — Wheat — Cotton — Development 
of  Mining  Industries — Iron  and  Coal — Gold — Silver — Cop- 
per— Petroleum — Mineral  Products,  1900 — Development  of 
Manufacturing  Industries — Manufactures  of  Iron  and  Steel — 
IManufacturcs  of  Cotton — Concentration  in  Manufacturing— 
The  Development  of  Foreign  Trade — Changes  in  Exports — 
Summary — Conclusion, 20 

vii 


viii  Contents 

CHAPTER  III 

Preliminary  Survey  of  the  Field  of  Economics 

PAGS 

The  Motives  to  Business  Activity — Characteristics  of  the  Economic 
Man — Self-interest — The  Larger  Self — Love  of  Independence 
— Business  Ethics — Utility — Free  Goods — Economic  Goods — 
Value — Relation  between  Utility  and  ^"aIue — Value  in  Use  and 
Value  in  Exchange — Price — Production  and  Consumption — 
The  State  of  Normal  Equilibrium — Effort  and  Sacrifice  In- 
volved in  Production — The  Cost  of  Production — Work  and 
Pay — The  World's  Workers — Wages — Property  and  Its  Earn- 
ings— The  Methods  of  Economics — Deduction — Induction — • 
Statistics — The  Laws  of  Economics — Necessity  of  Recasting 
Economic  Laws — Outline  of  Book — Conclusion — Bibliograph- 
ical    Note, 46 

CHAPTER  IV 

The  Consumption  of  Wealth 

Characteristics  ■  of  Human  Wants — Law  of  Diminishing  Utility — 
Present  vs.  Future  Goods — Wants  Determined  by  Social  Stand- 
ards—The Law  of  Demand — The  Law  of  Variety — The  Law 
of  Harmony — The  Law  of  Least  Social  Cost — Adaptation  of 
Consumption  to  the  Environment — Adaptation  to  Tastes  of 
Producers — Progress  Due  toChanges  inTaste — Adaptation  to 
Laws  of  Economical  Production — Economical  Consumption — 
Nutritive  Value  of  Different  Foods — Luxury — Necessaries  for 
All  before  Luxuries  for  Any — The  Point  of  View — Fallacies 
Respecting  Luxury — Defensible  Luxury — Saving  vs.  Spending 
— Statistics  of  Consumption — Consumption  in  the  United  States 
— Family  Budgets — Two  Aspects  of  Consumption — Conclusion,    63 

CHAPTER  V 
Value  and  Price 

The  Valuations  of  a  Crusoe — Value  in  Use  Depends  on  Marginal 
Utility — Valuations  Refer  to  Units  of  Commodity — Qualifica- 
tions— Marginal  Cost  and  Value — The  Rlelation  between  Utility 
and  Disutility — Surplus  Utility— Marginal  L'^tility  and  Value  in 
Industrial  Society  —  Different  Goods  Valued  by  Different 
Classes — Valuation  even  of  Single  Goods  Complex — Valuation 
a  Social  Process— IMarginal  Cost  and  Value  in  Industrial  So- 


Contents  ix 

PAGE 

ciety — Complications  in  Calculation  of  Social  Cost — Valuation 
of  ConipleinciUary  Goods — Factors  in  Production  Complement- 
ary Goods — Values  in  Use  and  Values  in  Exchange — Values 
in  Exchange  Expressed  as  Prices — Exchange  Values  Cannot 
Increase  or  Decrease — The  Value  of  Money — Influences  Affect- 
ing It — The  Determination  of  Prices — Buyers'  Calculations — 
Sellers'  Calculations — Four  Possil)Ie  Cas-es — One  Buyer  and 
One  Seller — Several  Buyers  and  One  Seller — One  Buyer  and 
Several  Sellers — Two-sided  Competition — An  Illustration — The 
Actual  Practice — The  One-price  System — Market  Prices — 
Normal   Prices — Summary — Conclusion, 8r 

CHAPTER  VI 

Production  :  Land  and  Natural  Forces 

Production  Defined — Manufacturing  and  Trading  as  Productive  as 
Agriculture — Factors  in  Production  :  Nature  and  Man — Capital 
— The  Productiveness  of  Land — Progress  in  Production — Dif- 
ferent Characteristics  of  Different  Pieces  of  Land — Old  and 
New  Countries  Contrasted — Differences  in  Expenses  of  Pro- 
duction Due  to  Differences  in  Land — Farming — Manufacturing 
— Conclusion — The  Law  of  Diminishing  Returns — Statement 
of  Law — The  Extensive  and  Intensive  Margins  of  Cultivation 
— Other  Differences  in  Lands — An  Illustration — Suburban  and 
Country  Plots  of  Land  Contrasted — City  and  Country  Plots  of 
Land  Contrasted — Conclusion — Summary — The   Rent  of  Land,  107 

CHAPTER  VH 
Production  :  Labour  and  Capital 

Labour  as  a  Factor  in  Production — Qualities  Influencing  Product- 
iveness of  Labourer — Qualities  are  Either  Inherited  or  Acquired 
— Health  and  Strength — Intelligence  and  Judgment — Ambition, 
Energy,  and  Perseverance — Imagination,  Ingenuity,  and  Knowl- 
edge— Evolution  and  Production — Capitalistic  Production — ■ 
Advantages  of  Capitalistic  Production — Capital  Goods  and  Cap- 
ital— Fixed  and  Circulating  Capital  Goods — Specialised  and 
Free  Capital  Goods — Fixed  Capital  Increasing — Capital  Subject 
to  Law  of  Diminishing  Returns — Also  Labour — Methods  of 
Accumulating  Capital — Saving  and  Investing — Borrowing  and 
Investing — Borrowing  Not  Always  for  Investment — Capital 
Goods,  Not  Money,  Saved — Buying  Stocks  and  Bonds  l^ocs 
Not  Add  to  Capital — Kinds  of  Capital  Goods — Land  and  Cap- 
ital— Acquired    Skill    Is     Not    Capital — Dealers'    Stocks    Are 


X  Contents 

PAGE 

Capital — Money — Progress  in  Capitalistic  Production:  The 
Middle  Ages — The  Growth  of  Commerce — Influence  of  the 
Industrial    Revolution  —  Summary  —  Conclusion,        .        .        .  120 

CHAPTER  VIII 

Production  :  Co-operation  and  Business 
Organisation 

Co-operation  in  Labour — Varieties  of  Co-operation — Dependence  of 
Co-operation  on  Development  of  Markets — The  Influence  of 
Improved  Transportation  Facilities — Qualities  Necessary  to 
Effective  Co-operation — Such  Qualities  Developed  by  Co-oper- 
ation Itself — The  Advantages  of  Co-operation — The  Disad- 
vantages of  Co-operation — Other  Considerations — Methods  of 
Gauging  the  Advantages  of  Co-operation — Statistics  of  Pin- 
making  in  1776  and  To-day — Progress  Greatest  in  Manufac- 
turing— Business  Organisation — The  Entrepreneur — Qualities 
of  a  Good  Entrepreneur — The  Single  Entrepreneur  System — 
The  Partnership — The  Corporation — Advantages  of  the  Cor- 
poration— Its  Disadvantages  :  Diffused  Responsibility — ^Misuse 
of  Borrowing  Power — Disregard  of  Public  Interest — Practical 
Aspects  of  Corporation  Problem — Large  vs.  Small  Scale  Pro- 
duction—Advantages of  Large  Scale  Production — Division 
of  Labour — Expensive  Machinery — Advantages  in  Trans- 
porting Industries — Economy  in  Buying  Supplies — Economy 
in  Connection  with  By-products — Can  Spend  More  on  Ex- 
periments— Business  Enterprises  Classified — The  Repre- 
sentative Firm — Summary — Relation  between  Production  and 
Distribution, I37 

CHAPTER   IX 
Production  and  Distribution 

Distribution  Concerned  First  with  ]\Ioney  Return — Replacement 
Fund  Deducted  to  Determine  Money  Return — Distribution  of 
Money  Income  and  of  Real  Income — Durable  Consumption 
Goods  Contribute  to  Real  Income — The  Net  Product  Consists 
Mostly  of  Unfinished  Goods — The  Real  Income  of  Goods  Ready 
for  Consumption — The  State  of  Normal  Equilibrium— In  which 
Net  Products  and  Real  Income  are  Interchangeable — Actual 
Society  Tends  Towards  the  Normal — Graphic  Presentation  of 
Foregoing  Propositions — The  Expenses  of  Production — The 
Replacement  Fund — Insurance  Premiums— Interest — Wages 
— Rent — Taxes— The  Normal  Expenses  of  Production— Normal 


Contents  xi 

PAGE 

Prices  Just  Cover  Normal  Expenses — Market  and  Normal 
Prices — Production  and  Distribution — Causes  of  Poverty  and 
the  Theory  of  Distribution, 155 

CHAPTER   X 

DiSTRinuTioN :  Net  or  Competitive  Profits 

The  Wages  of  Management — The  Wages  of  Management  Set  a 
Minimum  below  Which  Profits  Will  Not  for  Any  Length  of 
Time  Fall — The  Wages  of  Management  May  Be  a  Very  Large 
Sum — Conditions  Fixed  for  the  Entrepreneur — The  Power  of 
Substitution — The  Source  of  Profits  Above  the  Wages  of  Man- 
agement— Price  Fluctuations  a  Source  of  Profits — Explana- 
tion— Efforts  to  Control  Prices — The  Consequences  of  the 
Failure  of  Such  Efforts — Dealings  in  "  Futures  " — Dealings 
in  "  Futures  "  Illustrated  by  Reference  to  Wheat — The  Eco- 
nomic Function  of  Speculation — Speculation  vs.  Gambling — 
Conclusions — The  Influence  on  Profits  of  Rising  Prices — 
Of  Falling  Prices — Alternations  between  Prosperity  and 
Depression  in  the  United  States — The  Influence  of  Discov- 
eries and  Inventions  on  Profits — Increased  Profits  of  Some  En- 
trepreneurs Offset  by  Diminished  Profits  of  Others — The  Influ- 
ence of  Improvements  in  Methods  of  Production  on  Profits — 
The  Process  by  which  Profits  are  Eliminated — Change  a  Cause 
of  Profits — Profits  and  Losses  the  Normal  Consequences  of 
Progress — The  Influence  of  the  Variableness  of  Climate  on 
Profits — Progress  Diminishes  Man's  Dependence  upon  Nature 
— Insurance  as  a  Means  of  Escaping  Consequences  of  Changing 
Natural  Conditions — Profits  and  Losses  Tend  to  Balance  Each 
Other — Profits  and  Rent — Profits  in  a  New  Countrj'  Usually 
in  Excess  of  Losses — Practical  Problem  Connected  with 
Profits  Due  to  Exploitation  of  Virgin  Natural  Resources — The 
Influence  of  Changes  in  the  Other  Shares  on  Profits — The 
Effect  of  Changes  in  Wages — Summary — Conclusion,        .        .  169 

CHAPTER  XI 
Distribution  :  Monopoly  Profits 

The  Nature  of  Monopoly — Distinction  between  Monopoly  and  Dif- 
ferential Advantage — Buyers'  Monopolies — The  Kinds  of  ^lo- 
nopoly — The  Importance  of  Different  Kinds  of  Monopoly  in 
the  United  States — ^Monopoly  fs.  Competitive  Industry — Limit 
ations  on  the  Power  of  Monopolies — The  Power  of  Substitution 
— Sugar  an  Example — Substitution  in  Connection  with  a  Rail- 
road— Potential  Competition  as  a  Check  on  ^Monopoly — The 
Case  of  the  Single  Village  Store — Competition  in  Connection 


xii  Contents 

PAGE 

with  Railroads — The  Fear  of  Governmental  Interference  a 
Check  on  Monopoly — Conclusion  in  Reference  to  Efficacy  of 
Checks — The  Law  of  Monopoly  Price — A  Patented  Brand  of 
Soap  as  an  Example — Another  Case — Law  of  Monopoly  Price 
Indicates  the  Limit  of  Price  Rather  than  the  Actual  Price — 
Complications  in  Connection  with  Monopoly  Prices — Practice 
of  Asking  Different  Prices  for  the  Same  Goods  Not  Unusual — 
Final  Statement  of  Law  of  Monopoly  Price — Reasons  for  Con- 
cealing Monopoly  Profits — Methods  of  Concealing  Monopoly 
Profits — The  Overcapitalisation  of  Monopolistic  Corporations — 
Stock  Watering — Difficulty  of  Measuring  Monopoly  Profits — 
Funded  Income  Defined — The  Role  of  the  "  Innocent  Invest- 
or "  in  Connection  with  Monopolies — Monopoly  is  Not  Nec- 
essarily Antagonistic  to  Public  Interest — Desirable  Monopolies 
Should  Be  Regulated — Monopoly  Profits  Not  Always  Large — 
The  Influence  of  Monopoly  Profits  on  the  Other  Shares  in  Dis- 
tribution— Practical  Phases  of  Monopoly  Problem  Treated  in 
Later     Chapters, i88 

CHAPTER  XII 

Distribution  :  Rent 

Contrast  between  Profits  and  Other  Shares  in  Distribution — The 
Nature  of  Rent — Problems  Connected  with  Rent — The  Source  of 
Rent — The  Principal  Grades  of  Land  Distinguished — Store  Sites 
— Residence  Sites — Plots  Devoted  to  Truck-Farming — Farm 
Land — Grazing  Land — Fertility  as  Important  as  Situation  in  De- 
termining Rent — The  Demand  for  Land  of  Different  Grades — 
Rent  Includes  L^sually  a  Marginal  as  well  as  a  Differential 
Element — The  Calculation  of  Rent — Summary  of  Explanation 
of  Rent — Graphic  Representation  of  the  Theory  of  Rent — ■ 
The  Rent  of  Land  of  Grade  D — The  Total  Rent — Other  Causes 
of  Rent — The  Rent  of  Sources  of  Water  Power — The  Rent  of 
Mines — Apparent  Exceptions  to  the  Law  of  Rent — The  No- 
rent  Margin  Found  in  Connection  with  Various  Uses  of 
Land — The  Rotation  of  Crops  Complicates,  but  Does  Not  Con- 
tradict the  Law  of  Rent — The  Average  Return  the  Basis  for 
Calculating  Rent — Land  Fit  Only  for  One  Use  May  Command 
High  Rent — Other  Exceptions — Obstacles  to  the  Exact  Cal- 
culation of  Rent — Investments  of  Capital  in  Land  and  Rent — • 
The  Capitalisation  of  Rent — Rent  a  Funded  Income — Summary 
of  the  Theory  of  Rent — Includes  Usually  a  Marginal  as  well 
as  a  Differential  Element — But  May  Be  Calculated  as  a  Dif- 
ferential from  the  Intensive  No-rent  Margin — A  Surplus 
Income — Does  Not  Arise  Where  Best  Land  is  Superabunda.nl 
—Its  Relation  to  Law  of  Diminishing    Returns — Return  from 


Contents  xiii 

PAGE 

Permanent  Improvements  Subject  to  Law  of  Rent — Price  of 
Land — Rent  Capitalised  at  Current  Rate  of  Interest — Actual 
Rent  Differs  from  Economic  Rent — The  Metayer  System — The 
Rent  of  Buildings  Distinct  from  Ground  Rent — Importance 
of  Rent  in  United  States — Rent  as  a  Source  of  Income  in 
Great  Britain, 205 

CHAPTER   XIII 

DiSTKii3UTioN  :   Wages 

Wages  Defined — The  Wages  Question — Differences  in  Rates  of 
Wages  Due  to  Varying  Capacities  of  Working  Population — 
Differences  Determined  in  Same  Way  as  Rents — The  Relation 
between  Members  of  Different  Groups — Tendency  towards 
Uniformity  of  Wages  in  Each  Grade — The  Different  Grades, 
into  which  Workmen  Are  Divided  Overlap — Workmen  below 
the  Margin  of  Their  Group — In  Practice  the  Number  of  Grades 
of  Workmen  is  Very  Large — The  Causal  Relation  between 
Marginal  and  Higher  Wages — The  Rate  of  Wages  Depends  on 
Demand  and  Supply  for  Workmen  of  Each  Given  Grade — Dif- 
ferences in  Wages  Perpetuated  by  the  Immobility  of  Labour — 
Efficiency  and  Time  Wages  Contrasted — Other  Causes  of  Dif- 
ferences in  Wages — Differences  in  the  Cost  of  Living — Differ- 
ences in  Cost  of  Mastering  Different  Trades — Differences  in 
Agrecableness  of  Different  Occupations — Allowance  for  Dan- 
gers Incurred — Allowance  for  Chance  of  Success — Social  Esteem 
a  Factor — Also  Regularity  of  Employment — Finally  Chances 
of  Promotion  Considered — Competition  Would  IVIake  Advan- 
tages of  Different  Employments  Equal  if  Men  were  Exactly 
Alike,  but  They  are  Not — The  Influence  of  Heredity  Indeter- 
minate— The  Influence  of  Habit,  Custom,  and  Education — Dif- 
ferences in  Standards  of  Living  Perpetuate  Differences  in 
Wages — Educational  Opportunities  Enjoyed  by  Children 
in  First  Grade — Children  of  the  Middle  Class — Their  Choice  of 
Occupations — Standards  of  Living  Not  Rigid — Children  in  the 
Third  Grade — The  Fourth  Grade — The  Fifth  Grade — Non- 
compeling  Groups — Reasons  for  Failure  to  Invest  More  Cap- 
ital in  Education — Conclusion — The  Determination  of  Marginal 
Wages, 22a 

CHAPTER   XIV 

Distribution  :  Interest 

Interest  Defined — Interest.  Rent,  and  W^ages — Differences  in  Rates 
of  Interest — The  Mobility  of  Capital  Depends  upon  the  Re- 
placement Fund — Differences    in  Rates  of  Interest  Eliminated 


xiv  Contents 

PAGE 

by  Compelition — Differences  in  the  Same  Branch  of  Produc- 
tion— Differences  in  Different  Branches  of  Production — 
Causes  of  Differences  in  Rates — Monopoly — Interest  on 
Permanent  Improvements — Specialised  Forms  of  Capital 
Have  Little  Mobility  over  Short  Periods — And  Are  Conse- 
quently Liable  to  Depreciate — Differences  in  Risk  of  Loss — 
Differences  in  Social  Esteem — Differences  in  Rates  between 
Different  Sections — Interest  on  Money — Reasons  for  the  Pay- 
ment of  Interest  for  the  Use  of  Money — Money  or  Pur- 
chasing Power  the  Form  first  Assumed  by  the  Replace- 
ment Fund — Interest  on  Money — Loans  Made  Uniform  in 
Each  Money  Market — Differences  in  Risk  Cause  Differences 
in  Rates  of  Interest — Differences  in  Rates  of  Interest  Less 
Extreme  than  Differences  in  Wages — How  Marginal  Wages 
and  Marginal  Interest  are  Determined — Marginal  Rates  May 
be  Studied  at  the  Margin  of  Cultivation — Entire  Return  at 
the  Margin  Constitutes  Wages  and  Interest — The  Circum- 
stances Determining  the  Amount  of  the  Joint  Share — The 
Influence  of  Entrepreneurs — Qualities  and  Quantities  of 
Workmen  and  Capital  Goods  Important — Both  Wages 
and  Interest  High  in  the  United  States — Workmen  and 
Capital  Goods  Compete  as  well  as  Co-operate — This  Com- 
petition Leads  to  Comparisons  and  Substitutions  by  which 
Wage  and  Interest  Rates  are  Determined — The  Law  of 
Distribution  for  a  Society  in  the  State  of  Normal  Equilib- 
rium— The  Same  Law  Applies  Roughly  to  Actual  Industrial 
Society — The  Law  of  Distribution  Illustrated — An  Increase  of 
Capital  Increases  the  Marginal  Productiveness  of  Labour — • 
The   Mutual  Interdependence  of   Shares    in   Distribution,        .  244 

CHAPTER   XV 

Value,  Price,  and  Distribution 

Summary  of  Theory  of  Value — Exchange  Value  and  Price — The 
Law  of  Price — Relation  between  Incomes  of  Consumers  and 
the  Expenses  of  Production — The  Influence  of  Monopoly  upon 
the  Shares  of  Income  Secured  in  Competitive  Industries — 
Graphic  Representation  of  Production  and  Distribution — 
Restatement  of  the  Law  of  Rent — Restatement  of  the  Law 
of  Wages — The  Wages  of  Marginal  Workmen — The  Law  of 
Interest — The  Calculation  of  the  Replacement  Fund — The 
Life  Period  of  a  Capital  Good  Depends  upon  Rates  of  Wages 
and  Interest — The  Law  of  Interest  Applies  to  Gross  Earn- 
ings of  Capital  Goods — Restatement  of  the  Law  of  Com- 
petitive   Distribution — The    Same     Law    Generalised — True 


Contents  xv 

FACE 

Relation  between  Expense  of  Production  and  Value — The 
Determination  of  Shares  in  Distribution  a  Complex  Form 
of  Valuation — The  Productivity  Theory  of  Distribution — 
The  Exchange  Theory  of  Distribution — Interest  a  Discount 
on  Future  Goods — The  Exchange  Theory  True  from  View- 
point of  Lenders — The  Sense  in  which  Capital  Goods  are 
Productive — Exchange  and  Productivity  Theories  Comple- 
mentary, Not  Contradictory — The  Wages-fund  Theory — 
Conclusions  Drawn  from  the  Wages-fund  Theory — 
Criticism  of  the  Theory — Other  Objections,  and  Con- 
clusion,          265 

•  CHAPTER  XVI 

Value,  Price,  and  Distribution  (Concluded) 

Ultimate  Determinants  of  Distribution — Statistics  of  Population — 
Significance  of  These  Statistics — Birth,  Death,  and  Marriage 
Rates  of  Principal  Countries — Comment  on  the  Table — The 
Malthusian  Doctrine  of  Population — Influence  of  the  Doctrine 
on  Economic  Thought — Criticism  of  the  Doctrine — Premisses 
in  Reasoning  about  Population — The  Physiological  Check — 
The  Influence  of  Social  Customs — The  Economic  Check — The 
Influence  of  the  Standard  of  Living — A  Stationary  Popula- 
tion— Conditions  Necessary  to  a  Low  Birth-rate — Causal 
Relation  between  the  Standard  of  Living  and  Wages  in  the 
United  States — Population  Should  Grow  at  the  Top,  Not  the 
Bottom — The  Influence  of  Immigration  and  Emigration — 
The  Growth  of  Population  Controlled  by  Standards  of  Liv- 
ing— The  Growth  of  Capital — The  Growth  of  Wealth  in  the 
United  Kingdom — In  the  United  States — Growth  of  Ag- 
ricultural and  Manufacturing  Capital — Necessary  Cautions — 
Present  Preferred  above  Future  Goods — Reasons  for  this 
Preference — The  Motives  to  Saving — Progress  Strengthens 
These  Motives — The  Ultimate  Determinants  of  Distribu- 
tion— The  Balancing  of  Utilities  against  Disutilities,        .        .  283 

CHAPTER  XVn 

Money  and  the  Monetary  System  of  the  United 

States 

The  Disadvantages  of  Barter — The  Nature  and  Functions  of 
Money — Money  a  Standard  of  Value — Also  of  Deferred  Pay- 
ments— Prices  and  the  Value  of  Money  Vary  Inversely — Sta- 
bility of  Value  a  Desirable  Attribute  of  J^foney — Various  Com- 
modities Used  as  Money  in    the  Past — Qualities  Needed  in  a 


xvi  Contents 

PAGE 

Good  Money — The  Role  which  the  State  Plays  in  Connection 
with  Money — Coinage  and  the  Printing  of  Paper  Moneys 
Standard,  Token,  and  Credit  Money — Gresham's  Law — An 
Illustration — Gresham's  Law  and  the  Present  Monetary  Sys- 
tem of  the  United  States — The  Adoption  of  the  Gold  Standard 
in  Europe — Its  Adoption  Outside  of  Europe — Monetary  His- 
tory of  the  United  States — The  Gold  Standard  Law — Present 
Monetary  System  of  the  United  States — Gold  Coin  Kept  at  a 
Constant  Parity  in  Value  with  Gold  in  Coin — ^How  the  Parity 
between  Gold  and  Silver  Coin  Is  Maintained — History  of 
United  States  Notes — The  Gold  Reserve — National  Bank 
Notes — Stability  of  the  Gold  Standard — The  Limping  Stand- 
ard— The  Silver  Hoard — Objections  to  Sale  of  Silver  Dol- 
lars— The  Function  of  Token  Money — Token  Money  of  the 
United  States — The  Function  of  Credit  Money — Objections 
to  Credit  Money — Credit  Money  of  the  United  States — 
Conclusion, 302 

CHAPTER   XVIII 

Credit  and  Banking 

The  Nature  of  Credit — Book  Credit — The  Banking  Business — 
Based  on  Confidence — The  Check  System — Checks  and  Drafts 
— Money  and  Credit — Importance  of  Deposits  to  Banks — Forms 
of  Bank  Loans — Call  and  Time  Loans — Banks  Lend  Their 
Credit  by  Means  of  Deposit  Accounts — Or  Bank  Notes — Inter- 
est on  Bank  Loans — Paid  for  Control  over  Capital — Gold 
Coin  is  Capital — Credit  is  Not  Capital,  but  it  does  the  Work 
of  Standard  Money — Limitations  on  the  Use  of  Bank  Credit — 
Interest  on  Call  Loans  Usually  Low — Short-time  Loans — 
Competition  Adjusts  Bank  Rate  of  Interest  to  General  Rate 
— Ought  Banking  to  be  Regulated? — Reasons  for  Favouring 
Regulation — History  of  the  National  Banking  System — The 
Present  Law — Protection  for  Depositors — Faults  in  System — 
United  States  Bank  Notes  are  Perversely  Elastic — Freer 
Note  Issue  Necessary — Defect  in  Reserve  Requirements — 
State  Banks — Savings  Banks — Trust  Companies — Conclu- 
sion,    323 

CHAPTER  XIX 

Some  Unsettled  Monetary  Problems 

Unsettled  Problems— The  Value  of  Gold  and  Prices— Demand  for 
Gold  in  Arts — Monetary  Demand — Not  Unlimited— Money  and 
Credit — Recent  Fluctuations  in   Monetary   Demand— The  Re- 


Contents  xvii 

PAGE 

serve  Demand — Conclusion  in  Reference  to  Demand — The  Sup- 
ply of  Gold — Probable  Future  of  Gold  Supply — Measuring  the 
Value  of  Money  by  Method  of  Index  Numbers — Defects  in  the 
Method — Relation  between  Value  of  Money  and  Level  of 
Prices — Price  Statistics — Reasons  for  Fluctuations  in  Prices — 
The  General  'JVend  of  Prices — Statistics  Not  Exact — Interna- 
tional Bimetallism — The  Time  for  it  Probably  Passed — The 
Silver  Question  in  the  United  States — The  Probable  Conse- 
quences of  the  Free  Coinage  of  Silver — The  Future  of  the 
Gold     Standard — The     Multiple     Standard,        ....  345 

CHAPTER   XX 
Foreign  Exchange  and  the  Tariff  Question 

The  Nature  of  Foreign  E.xchange — Anglo-American  Trade — Ster- 
ling Exchange — The  Gold  Points — The  Rate  of  Sterling  Ex- 
change— The  Rate  of  Interest  and  Foreign  Exchange — Prices 
of  Stocks  and  Foreign  Exchange — Prices  of  Commodities  and 
Foreign  Exchange — Ways  of  Quoting  Foreign  Exchange — 
Three-cornered  Exchanges — Exchanges  between  Gold  and 
Silver  Standard  Countries — A  Country's  Gold  Supply  Reg- 
ulates Itself — The  United  States  Should  Normally  Export 
Gold — Foreign  and  Domestic  Trade  Compared — Peculiarities 
of  Foreign  Trade — Principle  ControllingForeign  Trade — The 
Policy  of  Protection — The  Advantages  of  Free  Trade — History 
of  Protection  in  the  United  States — The  Home-market  Argu- 
ment— The  Infant-industry  Argument — Argument  of  List — 
Protection  in  tlie  United  States  Since  the  Civil  War — The 
Wages  Argument — Political  Ideal  of  Protectionists — The 
Tariff  of  1897 — The  Burden  of  Protection — Coniplexitj^  of  the 
Tariff  Question — Present  Status  of  the  Tariff  Question  in  the 
United  States — The  Strength  of  Protection — Opposition  to 
Protection  to  Trusts — Folly  of  Protecting  Exploitation  of  Lim- 
ited Natural  Resources — The  Burden  of  Protection  to  Pro- 
ducers for  Export — Retaliatory  Tariffs — The  Future — Free 
Trade — The  Present  Trade  Policy  of  the  United  Kingdom — 
The  Free-trade  Movement,  i860- 1870 — The  Protectionist  Re- 
action— The  Present  Outlook   Abroad, 361 

CHAPTER   XXI 

The  Lai'.our  ^Movement 

Obstacles  to  Free  Competition  in  the  Labour  Market — The  Dis- 
advantages of  Wage-earners  as  Bargainers — Competition  by 
Employers  an  Active  Force — Nature  of  the  Labour  Movement 
— Objects  of  Labour  Unions — The  Membership  of  American 


xviii  Contents 

PAGE 

Unions — Of  British  Unions — Importance  of  Legal  Questions 
— The  Development  of  Trade-union  Law  in  the  United  King- 
dom— Growth  of  Unions — English  Law  of  Conspiracy — Labour 
Unions  Liable  for  Damages — The  Law  in  Reference  to  Labour 
Unions  in  the  United  States — The  Influence  of  English  Prece- 
dents— The  Benefit  Features  of  Labour  Unions — Collective 
Bargaining — Employers'  Objections  to  Collective  Bargaining — 
Conclusion — Strikes  and  Lockouts — Use  of  the  Boycott  in  the 
Coal  Strike — Difficulty  of  Enforcing  Law  during  Strikes — 
Plans  for  Avoiding  Strikes — Trade  Agreements — State  Board 
of  Conciliation  and  Arbitration — Reasons  for  Government  In- 
terference— Compulsory  Arbitration — New  Zealand's  System — 
The  System  of  New  South  Wales — Use  of  the  Injunction  in 
Connection  with  Strikes — Legal  Justification — Extension  of 
Scope  of  Injunctions — Reasons  for  Opposing  Resort  to  Injunc- 
tions— The  Influence  of  Labour  Unions  on  Wages — The  Case 
of  Open  Unions — Labour  Unions  Sometimes  Monopolies  — 
State  and  Federal  Laws  Helpful  to  Unions — Monopolistic 
Unions  to  be  Condemned  Like  Other  ]\Ionopolies — Educational 
Work  of  Labour  Unions — Schools  of  Citizenship — Active  in 
Securing  Needed  Labour  Laws — The  Future  of  the  Labour 
Movement, 385 

CHAPTER    XXII 
The  Legal  Regulation  of  Labour 

Reasons  tor  the  Legal  Regulation  of  Labour — Employees  Do  Not 
Always  Bargain  on  Equal  Terms  with  Employers :  Children — 
Women — Men — Dangerous  Trades— Purpose  of  Protective  Laws 
— History  of  Labour  Legislationin  Great  Britain — 1802-1831 — 
Act  of  1833 — Mining  x\ct  of  1842 — The  Present  Law — Constitu- 
tionality of  Labour  Laws  in  the  United  States — Conflicting 
Decisions  of  American  Courts — Decision  in  Utah  Eight-hour 
Law  Case — Value  of  this  Precedent — Child-labour  Laws  in 
the  United  States — Purpose  of  Such  Laws — Laws  Regulating 
Labour  of  Women — The  Agitation  for  a  Universal  Legal 
Eight-hour  Day — Objections  to  Plan — Restrictions  of  Labour 
of  Men  Defensible — The  Sweating  Evil — Conditions  in  the 
Clothing  Trades — Remedies  Tried  in  Great  Britain  and  the 
United  States — Australasian  Experiments — Conclusion — The 
Regulation  of  Dangerous  Trades — System  in  Great  Britain 
— Employers'  Liability  in  the  United  States — The  Workmen's 
Compensation  Act  of  Great  Britain — Continental  Systems — 
Backwardness  of  the  United  States  in  This  Field — Arguments 
for  and  against  the  Legal  Regulation  of  Labour — Need  of 
Uniformity  in  the   United   States — The   Future,        .        .        .  412 


Contents  xix 

CHAPTER  XXIII 
Legal  and  Natural  Monopolies 

PAGE 

Importance  of  the  Monopoly  Problem — Public  Legal  Monopolies — 
Purposes  of  Such  Monopolies — The  United  States  Post-office 
— Private  Legal  Monopolies  in  Great  Britain — In  the  United 
States — The  Patent  System — Arguments  for  and  against  Pat- 
ents— Objections  Answered — Proposed  Reforms  in  the  Patent 
System — Patents  as  a  Source  of  Monopoly  Profits — Registered 
Labels  and  Trade  Marks — The  System  of  Copyright — Defects 
of  American  Law — Natural  Monopolies  in  the  United  States^ 
Natural  Monopolies  of  Situation — The  Anthracite  Coal  Com- 
bination— Its  Present  Status — Need  of  Regulation — Other  Mo- 
nopolies of  Situation — Natural  Monopolies  of  Organisation — 
The  Business  of  Supplying  Water — The  Gas  and  the  Electric 
Light  Monopolies — The  Street  Railway  Monopoly — Reasons 
for  Combination — Advantages  of  Combination — The  Telephone 
Monopoly — Advantages  of  Monopoly — Methods  of  Increasing 
Telephone  Rates — Monopoly  Profits  of  Municipal  Monopolies 
in  the  United  States — Such  Profits  Now  Capitalised — The  So- 
lution of  the  Municipal  Monopoly  Problem — Arguments  for 
Public  Ownership — Against  Public  Ownenship — Other  Con- 
siderations— Situation  in  the  United  States — In  Europe — Meth- 
ods of  Regulating  Municipal  Monopolies — Obstacles  to  Regula- 
tion   in    the    United    States, 434 

CHAPTER   XXIV 
The  Railroad  Problem  in  the  United  States 

National  Monopolies  of  Organisation — Circumstances  Making  the 
Railroad  Business  Monopolistic — Progress  toward  Concentra- 
tion in  the  Railroad  Business  in  the  United  States — Discrim- 
ination in  Railway  Rates — Between  Commodities — Between 
Places — Between  Persons — Reasons  for  Discriminations — Case 
of  the  South  Improvement  Company — Monopoly  Profits  from 
the  Railroad  Business  in  the  United  States — National  Regu- 
lation— The  Interstate  Commerce  Act — Defects  in  the  Act — 
Its  Interpretation  by  the  Courts — Amendment  of  1903 — Argu- 
ments for  and  against  National  Operation  of  Express  and 
Telegraph  Businesses — Arguments  for  National  Ownership 
and  Operation  of  the  Railroads — Argument  against  the  Pol- 
icy— Other  Considerations — Need  of  Reform  in  Interstate 
Commerce  Act — Changes  Recommended  by  the  Commission,  460 


XX  Contents 


CHAPTER  XXV 

Capitalistic  Monopolies,  or  Trusts, 
IN  the  United  States 

PAGE 

Capitalistic  Monopolies  or  Trusts — Motives  for  Organisation  of 
Trusts — The  Early  Trusts — The  Present  Trusts — Organisation 
of  the  United  States  Steel  Corporation — The  Earlier  Trusts — • 
Progress  of  the  Trust  Movement — The  Motives  of  Manufac- 
turers— The  Activity  of  Promoters — Reasons  for  Formation  of 
Steel  Trust — Distrust  of  Trusts  on  the  Part  of  the  Public — 
The  Successful  Trusts — Extent  of  Control  of  Trusts  over 
Production — Resulting  Control  over  Prices — Limits  to  this 
Control — Conflicting  Opinions  in  Reference  to  Trusts — Econ- 
omies Effected  by  Trusts — Reduced  Expenses  for  Advertising 
— Saving  in  Cross  Freights — Better  Adaptation  of  Production 
to  Demand — Minor  Advantages — Illegitimate  Practices  of  the 
Trusts — Obtaining  Rate  Discriminations  from  Railroads — 
Price  Discrimination  among  Places — Unfair  Contracts  with 
Dealers — The  Tariff  and  the  Trusts — The  Tariff  the  Mother  of 
Some  Trusts — Other  Evils — Overcapitalisation — Corruption 
of  Public  Officials — Excessive  Prices  for  Trust  Products — The 
Constitutional  Obstacle  to  Legal  Regulation  of  the  Trusts — 
The  Common  Law — Anti-Trust  Legislation — The  Ohio  Act 
of  1898 — Futility  of  Anti-Trust  Acts — The  Present  Status  of 
the  Trusts — Published  Reports  now  Required  by  National  Gov- 
ernment— Plans  for  Securing  Legal  Control  over  the  Trusts — 
Such  Control  Should  be  Exercised  by  the  Federal  Government 
— Voluntary  Federal  Incorporation  Advocated — The  Regula- 
tions Needed — Suppression  of  Practices  Leading  to  Unfair 
Competition — Reform  of  Tariff  on  Triist  Products — The 
Future  of  the  Trusts— Power  of  Substitution  a  Weapon  for 
Controlling    Monopolies, 476 

CHAPTER   XXVI 
Plans  of  Economic  Reform 

Four  Plans  of  Economic  Reform — Profit-sharing — Objections  to 
the  Sliding-scale  System — Objections  to  Sharing  Losses — Other 
Plans  of  Profit-sharing — Labour  Copartnership — in  Great 
Britain — The  English  Co-operative  Wholesale  Societj' — The 
Scottish  Society — Present  Status  of  Copartnership — Reasons  for 
Backwardness  of  the  United  States — Reasons  for  Success  and 
Failure  of  Co-operative  Experiments — The  Future  of  Labour 


Contents  xxi 

FAGS 

Copartnership— Land  Nationalisation — Advantages  of  Private 
Property  in  Land  in  Great  Britain — In  the  United  States— The 
Present  Problem— Evils  of  Absentee  Landlordism — The  Situ- 
ation in  the  United  States— The  Single  Tax— Objections  to  the 
Single  Tax — It  Is  Inadequate — It  Would  Involve  Wholesale 
Confiscation— Conclusions  as  to  Single  Tax — Socialism — Com- 
munism— Plans  for  Realising  Socialism — Economic  Advan- 
tages of  Socialism— Moral  Advantages — Objections  to  Social- 
ism— Difficulty  of  Apportioning  Labour  Force  Economically — 
Difficulty  of  Valuing  Goods — Difficulty  in  Connection  with 
Capital — Progress  under  Socialism — Conclusion — The  Social- 
ism of  Karl  Marx — Criticism— Conclusion 510 


CHAPTER  XXVII 

Government    Expenditures   and    Government 

Revenues 

Importance  of  Public  Finance — Government  Expenditures  in 
United  States — For  Education — For  Defence — For  Protection 
— For  Charitable  Relief — For  Industrial  Purposes — For  De- 
partments of  Government — Miscellaneous — Government  Ex- 
penditures Designed  to  Promote  the  General  Welfare — Public 
vs.  Private  Expenditures — Division  of  Governmental  Functions 
in  United  States — Corresponding  Division  of  Expenditures — 
Relative  Importance  of  Public  and  Private  Expenditures  in 
United  States — Sources  of  Public  Revenues — From  Public 
Lands — From  Public  Industries — From  Special  Assessments 
and  Taxes — From  Loans — War  Loans — Industrial  Loans — De- 
ficiency Loans — Restrictions  on  Borrowing  Power  in  United 
States — Revenue  from  Gifts— From  Fines  and  Fees — Defini- 
tion of  a  Tax — Taxation  Should  Fall  on  Each  in  Proportion  to 
Ability — The  Equal  Sacrifice  Theory — Principal  Taxes  in 
United  States — Tax  Provisions  of  Federal  Constitution — Shift- 
ing and  Incidence  of  Taxes — Incidence  of  Customs  and  Excise 
Taxes— Property  and  Poll  Taxes — Evasion  of  General  Property 
Tax — Evidence  of  Evasion — Incidence  of  General  Property  Tax 

-Classification  of  General  Property  Tax — Tax  on  Land  Paid 
by  Land  Owner — Capitalisation  of  Land  Taxes — An  Example 
— Old  and  New  Land  Taxes  Contrasted — Tax  on  Buildings 
Paid  by'lpccupiers — On  Mortgages  by  Borrowers — Injustice  of 
Personal  Property  Tax — Conclusions — Corporation  Taxes — 
Gross  Receipts  Taxes — Net  Income  Taxes — The  Special  Fran- 
chise Tax  of  New  York  State— Its  Resemblance  to  Land  Tax 

—Liquor  License  Taxes — Inheritance  Taxes,     ....   533 


xxii  Contents 


CHAPTER    XXVIII 
Taxation  and  Tax  Reform  in  the  United  States 

PAGE 

Practical  Aspects  of  Taxation — The  Tariff  of  United  States — Cus- 
toms and  Internal  Revenue  Duties  Compared — Advantages  of 
Internal  Revenue  System — Substitution  of  Corporation  Taxes 
for  General  Property  Tax — Unequal  Assessments — Disad- 
vantages of  General  Property  Tax — Taxing  System  of  New 
York  State — Corporation  Taxes — The  Special  Franchise  Tax — 
Inheritance  Taxes  in  United  States — And  Abroad — Justification 
for  Progressive  Rates — Advantages  of  Inheritance  Taxes — The 
British  Income  Tax — State  Income  Taxes — The  Federal  In- 
come Tax — The  Income  Tax  of  1894  Unconstitutional — Argu- 
ments for  and  against  Federal  Income  Tax — Place  of  Taxation 
in  Theory  of  Distribution — Three  Classes  of  Taxes  Distin- 
guished— Conclusions  as  to  Land  and  Special  Franchise  Taxes 
— Conclusions  as  to  Customs  and  Excise  Taxes — As  to  Inheri- 
tance, Income,  and  General  Property  Taxes — Difficulties  in 
Way  of  Tax  Reform — Tax  Problem  of  Cities — Reform  of 
Federal  Revenue  System — Of  State  Taxation — General  Prop- 
erty Tax  Abolished — Inheritance  Taxes  Extended — Corpo- 
ration Taxes  Advocated — High  License  System  Extended — 
Real  Estate  Tax — Special  Franchises — License  Taxes — Con- 
clusions as  to  Municipal  Taxation— General  Conclusion,    .        .  563 


CHAPTER   XXIX 

Economic  Progress 

The  Nature  of  Economic  Progress— Changes  in  Wages  and  Hours 
of  Labour — Progress  in  Consumption — Increased  Variety — 
Increased  Harmony — Reduced  Costs— Increased  Economy — 
Consumers'  Leagues — Progress  in  Production — Progress  in 
Distribution— Reasons  for  Persistence  of  Low  Wages — Influ- 
ence of  the  Growth  of  Population — Economic  Justification  of 
Competitive  Profits— Monopoly  Profits— Rent  and  Interest — 
Justification  of  Rent— Justification  of  Interest— Unequal  Dis- 
tribution of  Wealth  Results  from  Inequalities  among  Individ- 
uals— Inheritance  Taxes — Progress  in  the  Future — The  Func- 
tion of  Labour  Unions— Of  Labour  Laws— The  Regulation  of 
Monopolies — Of  Housing  Conditions — Free  Public  Schools — 
Tax  Reform — Progress  Depends  on  the  Individual — Probable 
Course  of  Wages,  Interest,  and  Rent  in  the  Future— Economic 
Progress  and  the  Moral  Elevation  of  the  Race— The  True  Goal 
of  Economic  Progress — Conclusion, 589 


CHAPTER  I 
THE    RISE   OF   MODERN    INDUSTRY   IN   ENGLAND 

S  I.  Economics,  or  political  economy,  is  the  social  science  Economics 
which  treats  of  man's  wants  and  of  the  goods  (/'.  e.,  the  ^  °^ 
commodities  and  services)  upon  which  the  satisfaction  of 
his  wants  depends.  It  analyses  wants,  classifies  goods  with 
reference  to  them,  and  considers  all  of  the  circumstances  which 
affect  the  production  and  distribution,  or  sharing,  of  goods 
among  the  injdividuals  who  compose  society.  In  discussing 
production  and  distribution  economists  treat  the  same  prob- 
lems that  engage  the  attention  of  business  men,  but  from  a 
social  rather  than  an  individual  point  of  view.  It  is  to  em- 
phasise this  distinction  that  economics  is  styled  a  "  social 
science."  A  definition  easy  to  remember  is  that  economics  is 
the  "  social  science  of  business." 

§  2.  Closely    related    to    economics    are    the    other    social  Its  Rela- 
sciences,  sociology,  politics,  law.  and  history.     By  some  writers  other° 
sociology  is  made  to  include  all  of  the  social  sciences,  not  ex-  Sciences 
cepting  economics.     Others  define  it  as  the  science  which  treats 
of  the  beginnings  of  society  and  of  the  first  principles  of  social 
organisation.     Still   a   third   group   understands   the   term    to 
include   problems   connected    with    society's   treatment   of   its 
dependent  classes.     Whichever  of  these  definitions  is  accepted, 
the  relation  of  sociology  to  economics  need  cause  no  confusion. 
The  latter  has  to  do  primarily  with  contemporary  conditions 
and   with   the   relations  between   independent,   self-supporting 
individuals  and  families,  and  the  goods  upon  which  their  well- 
being  depends. 


Politics 
and  Law 


History 


The  Mano- 
rial System 


2        Rise  of  Modern  Industry  in  England 

Politics  treats  of  the  political  organisation  of  society,  and  law 
is  the  aggregate  of  rules  and  regulations  through  which  formal 
expression  is  given  to  the  social  will.  Neither  is  likely  to  be 
mistaken  for  economics,  although  both  inlluence  largely  the 
business  institutions  and  practices  with  which  economics  is 
concerned.  The  political  organisation  determines  what  classes 
shall  have  a  dominant  inHuence  in  choosing  the  laws  that  are 
to  be  passed  and  enforced,  and  laws  themselves  establish  stand- 
ards to  which  all  must  conform.  The  solution  of  most  of  the 
practical  economic  problems  which  are  discussed  in  later  sec- 
tions of  this  work  will  be  found  to  hinge  upon  the  repeal  of 
unwise  laws  or  the  enactment  of  wise  ones. 

History,  in  the  broadest  sense,  is  the  narrative  of  past  events. 
To  the  economist  economic  or  industrial  history,  the  narrative 
of  past  events  touching  relations  between  men  and  goods,  is 
of  special  significance.  In  fact,  a  knowledge  of  the  principal 
facts  of  modern  industrial  history  is  so  necessary  to  an 
understanding  of  present  economic  phenomena  that  it  has 
seemed  wise  to  introduce  this  work  with  a  sketch  of  the  Rise 
of  Modern  Industry  in  England,  and  of  the  Industrial  Expan- 
sion of  the  United  States. 

§  3.  The  earliest  form  of  industrial  organisation  of  which 
we  have  full  knowledge  from  English  history  is  the  "  mano- 
rial "  system.  In  existence  before  the  Norman  Conquest,  it 
was  not  entirely  superseded  until  the  sixteenth  century, 
and,  therefore,  controlled  English  industrial  activity  for  a 
longer  period  than  any  system  which  has  since  developed.  To 
understand  it  clearly  it  is  necessary  to  remember  that  during 
the  period  when  it  flourished  international  intercourse  took 
the  form  of  fighting  more  commonly  than  that  of  trading,  that 
each  country  was  economically  self-sufficient  or  nearly  so,  and 
that  in  order  to  maintain  itself  each  community  was  forced  by 
its  ignorance  of  efficient  industrial  processes  to  give  nearly  all 
of  its  time  to  providing  for  the  satisfaction  of  its  primary 
wants,  for  food,  clothing,  and  shelter.  The  manorial  system 
was  thus,  on  one  side,  a  method  of  organising  the  nation  for 
military  purposes  and,  on  the  other,  a  plan  for  securing  the 
cultivation  of  the  soil.  It  is  the  latter  aspect  which  interests 
the  economist. 


The  Manorial  System  3 

The  manorial  system  was  at  its  heij^ht  about  the  middle 
of  the  thirteenth  century.  At  that  time  the  whole  culti- 
vated portion  of  England  was  divided  up  into  estates  or 
"  manors "  averaging  about  5000  acres  in  extent.  The 
actual  work  of  tillage  on  these  manors  was  performed  for 
the  most  part  by  serfs  or  "  villeins,"  whose  position  was,  from 
our  modern  point  of  view,  peculiar.  The  villein  was  not  a 
slave,  and  yet  he  could  not  legally  leave  the  place  in  which  he 
was  born  or  neglect  his  customary  work  without  the  consent 
of  the  lord  of  the  manor.  On  the  other  hand,  although  he  did 
not  own  the  allotment  of  land  which  he  cultivated,  he 
was  entitled  to  it  by  immemorial  usage  and  might  appeal  to  the 
manorial  court  for  redress  if  it  was  withheld  from  him.  The 
method  of  tillage  was  even  more  remarkable.  Instead  of  being 
divided  up  into  a  number  of  separate  farms  or  allotments,  each 
to  be  cultivated  independently  and  continuously  by  the  same 
tenant,  the  arable  land  of  the  manor  was  divided  up  into  three 
great  fields,  hundreds  of  acres  in  extent,  each  one  of  which 
was  planted  with  a  single  crop.  The  usual  practice  w^as  to  sow 
one  field  with  wheat  or  rye,  another  with  oats  or  barley,  and  to 
allow  the  third  to  lie  fallow  as  a  preparation  for  the  heavy  crop 
to  be  grown  the  following  year.  The  ordinary  allotment  made 
to  a  villein  was  some  thirty  acres,  assigned  usually  in  half-acre 
or  acre  strips  from  different  parts  of  the  farm.  By  this  plan 
the  villein  was  enabled  to  participate  in  the  different  kinds  of 
agriculture  carried  on  in  the  different  fields,  while  at  the  same 
time  he  received  a  share  of  the  good  as  well  as  of  the  poor 
land.  He  paid  for  his  allotment,  not  with  money,  but  with 
labour,  and  the  amount  of  labour  was  fixed  by  immemorial  cus- 
tom. 

The  most  important  labour  was  "  week-work,"  /.  c,  work 
on  the  land  which  the  lord  retained  for  himself  for  two  or 
three  days  each  week  throughout  the  year,  and  "  boon-day  " 
work  or  continuous  work  on  the  lord's  land  for  one  or  two 
weeks  during  the  ploughing  season  and  the  season  of  harvest. 
In  addition  certain  presents  and  special  services  were  required 
of  the  villein  at  stated  seasons. 

The  manorial  system  w^as  so  different  from  that  which  now 
prevails  in  the  Western  World  that  it  will  be  desirable  to  indi- 


Manorial 

and 

Modern 

Systems 

Contrasted 


4        Rise  of  Modern  Industry  in  England 

cate  some  of  the  more  important  points  of  contrast.  In  the 
first  place,  fully  nine-tenths  of  the  population  of  England  lived 
in  the  country  on  these  manorial  estates,  and  the  larger  part 
consisted  of  the  villeins  and  their  families.  To-day  in  Great 
Britain  nearly  two-thirds  of  the  people  live  in  cities  of  io,ooQ 
or  more  inhabitants.  Secondly,  most  of  the  inhabitants  of  the 
manor  were  condemned  to  live  and  die  where  they  were  born, 
and  few  of  them  ever  visited  other  places  or  came  in  contact 
with  other  ways  of  living.  The  difficulty  and  danger  of  travel, 
the  scarcity  of  money  and  other  forms  of  wealth  that  might  be 
treasured  up  and  easily  transported,  and  the  poverty  of  those 
of  the  villein  class,  were  all  conditions  serving  to  reinforce  the 
legal  obstacles  to  the  free  movement  of  population  from  one 
part  of  the  country  to  another.  It  was  a  rigid  system  of  status 
in  which  children  were  forced  to  follow  in  the  footsteps  of  their 
fathers  and  only  those  of  rare  ability  could  hope  to  rise  above 
the  positions  to  which  they  were  born.  Thirdly,  each  villein 
family  produced  for  itself  practically  everything  it  required. 
The  few  exchanges  in  which  villeins  participated  consisted  in 
the  barter  of  their  products  for  the  small  quantities  of  salt,  iron, 
and  other  foreign  goods,  which  they  needed  and  could  not  pro- 
duce for  themselves.  Under  these  circumstances  the  stimulus 
of  competition,  so  active  where  production  is  for  the  general 
market,  was  almost  entirely  absent.  The  result  was  that  slow 
development  of  industrial  processes  which  made  the  perpetua- 
tion of  the  system  for  so  many  centuries  possible.  The  crops 
to  be  sown  and  the  methods  of  cultivation  had  become  matters 
of  tradition  and  the  idea  of  improving  upon  the  wisdom  of  the 
fathers  touching  these  subjects  was  foreign  to  the  thought  of 
the  age.  Thus  generation  followed  generation,  dividing  up  the 
land  in  the  same  way,  using  the  same  crude  implements,  sub- 
sisting on  the  same  sorts  of  food,  dwelling  in  the  same  sorts  of 
houses,  and  wearing  the  same  sorts  of  clothes.  Fourthly,  as 
already  stated,  money  was  almost  unknow^n  to  dwellers  on 
the  manorial  estates.  Between  the  products  of  their  labour  and 
the  commodities  they  themselves  desired,  there  was  no  confus- 
ing intermediary  to  leave  them  uncertain  whether  they  were 
receiving  all  to  which  they  were  entitled.  Thus  the  mediaeval 
state  was  largely  relieved  of  one  of  the  most  serious  economic 


The  Guild  System  5 

responsibilities  of  a  modern  government,  the  duty  of  supplying 
a  good  medium  of  exchange. 

§  4.  Contemporaneous  with  the  manorial  system  in  the  coun-  The  Guild 
try  was  the  guild  system  in  the  town.    To  understand  the  latter  ^yst^'" 
it  is  necessary  to  remember  that  towns  grew  up  as  centres     /^ .  \ 
of  trade  and  that  their  populations  were  made  up  in  part  of    .'    /    ) 
persons  who  had  broken  away  from  the  restraints  of  manorial  ^ 

life.     The  result  was  constant  friction  between  the  inhabitants    ,       ,/ 
of  the  towns  and  the  nobles  who  so  largely  dominated  the  coun-  ^^ 

try.  At  the  same  time  there  was  in  progress  a  struggle  be-  /r,  .  -  ^ 
tween  the  latter,  who  were  jealous  of  the  royal  power,  and  the 
king,  which  made  an  alliance  between  king  and  townspeople 
so  natural  as  to  be  almost  inevitable.  The  king  guaranteed  the 
dwellers  in  the  towns  special  privileges,  confirmed  usually  by 
royal  charter,  while  in  return  the  townspeople  promised  special 
contributions  to  the  royal  exchequer  and  unswerving  loyalty  in 
time  of  emergency. 

Since  trade  was  the  primary  purpose  of  the  town,  trading  ^iierchant 
privileges  were  those  first  demanded,  with  the  result  that  Guilds 
practically  whole  towns  were  incorporated  as  trading  or 
"  merchant  guilds."  The  privilege  was  usually  confined  to 
a  monopoly  of  trade  in  all  but  the  most  necessary  articles 
within  the  town  itself.  Often,  however,  the  privilege 
embraced  the  trade  in  certain  products  in  other  towns  or 
even  throughout  the  kingdom.  Interesting  features  of 
the  merchant  guilds  were  the  minute  rules  by  which  they 
regulated  the  conduct  of  their  members  in  reference  to 
buying  and  selling.  In  this  respect  they  were  not  unlike 
modern  stock  exchanges,  except  that  the  rules  of  the  strictest 
exchange  are  lax  in  comparison  with  those  of  the  merchant 
guild.  The  purpose  of  the  rules  of  the  latter  was  to  promote 
fair  dealing,  fraternal  relations  between  members,  and,  in  gen- 
eral, a  regard  for  the  interests  of  the  trade  as  a  whole,  in  place 
of  exclusive  regard  for  individual  gain  in  special  transactions. 
Such  matters  as  the  times  and  places  for  holding  particular 
markets,  the  qualities  of  goods  to  be  dealt  in,  and  the  methods 
of  bargaining  to  determine  prices  came  in  for  special  regula- 
tion. The  enforcement  of  these  rules  was  entrusted  to  wardens 
or  inspectors  appointed  from  guild  members,  and  the  punish- 


6        Rise  of  Modern  Industry  in  England 

ments  inflicted  on  transgressors  ranged  from  public  censure 
to  fine,  imprisonment,  and  expulsion  from  the  guild. 
Craft  As  the  towns  grew  they  came  to  be  the  seats  of  various 

^"^  handicrafts,  and  within  one  hundred  years  after  merchant  guilds 

were  organised  "  craft  guilds  "  began  to  be  formed.  These  were 
unions  of  the  artisans  engaged  in  each  particular  handicraft 
and  were  designed  partly  to  promote  honest  work,  fraternal 
relations,  etc.,  as  in  the  case  of  the  merchant  guilds,  and  partly 
to  secure  for  their  members  the  right  to  trade  in  their  own 
products.  Like  the  merchant  guilds,  the  craft  guilds  formu- 
lated and  enforced  most  minute  regulations  concerning  the  con- 
duct of  their  members.  Thus,  night  work  was  frequently  pro- 
hibited, weights  and  measures  were  regulated,  and  the  adulter- 
ation of  goods  was  forbidden. 

As  voluntary  associations  of  nominal  competitors  both  mer- 
chant and  craft  guilds  undertook  to  restrain  competition  in  the 
interest  of  the  whole  trade.  They  rendered  for  their  members 
many  of  the  services,  such  as  protecting  their  persons  and  prop- 
erty, which  are  now  performed  by  the  state  or  government ;  but 
in  addition  they  bound  their  members  not  to  pass  beyond  cer- 
tain limits  in  their  competition  with  their  guild  brothers  lest  the 
interests  of  the  corporate  group  should  suffer.  Thus  in  the 
towns,  as  in  the  country,  competition  was  much  restricted  at 
this  period  and  in  its  place  local  customs  and  local  regulations 
largely  determined  the  direction  of  industrial  activity. 

In  the  towns  the  institution  of  private  property  was  more 
highly  developed  than  in  the  country,  since  most  town  wealth 
was  personal  and  the  effective  utilisation  of  town  land  re- 
quired it  to  be  more  completely  under  the  control  of  the  person 
using  it.  At  the  same  time,  a  town  "  common,"  or  piece  of 
land  used  in  common  by  all  the  townsfolk,  was  a  usual  feature 
of  town  organisation,  and  in  other  ways  the  original  connec- 
tion of  the  towns  with  the  manors  was  shown. 

Change  §  ^.  The  decav  of  the  manorial  system  and  of  the  guilds 

from  Local  ,',..,.„,  '  * 

to  National  was  SO  gradual  that  it  is  difficult  to  trace  its  progress.     The 

Regulation   flj-st  great  change  was  a  substitution  of  money  payments  for 

the  labour  dues  formerly  required  of  villeins.     This  was  part 

of  a  general   substitution  of  money  exchanges   for  barter   in 

all  departments  of  industrial  life  and  probably  did  more  than 


The  Black  Death  7 

anything  else  to  break  down  the  mediaeval  and  usher  in  the 
modern  system  of  industry.  The  change  was  made  possible 
for  England  by  the  active  demand  for  her  wool  on  the  Conti- 
nent, especially  after  the  Crusades  in  the  thirteenth  century, 
which  did  much  to  develop  international  trade.  In  exchange 
for  wool,  silver  was  imported,  and  this  was  coined  and  gradu- 
ally put  into  circulation  in  all  parts  of  the  country.  Lords  of 
manors  did  not  oppose  the  change  because  it  was  clearly  to 
their  advantage  to  permit  their  villeins  to  substitute  money 
payments  for  their  labour  dues,  so  long  as  they  could  hire 
labour  as  it  was  required,  particularly  in  cases  where  their 
lands  could  be  profitably  converted  into  great  sheep  runs. 

The  last  attempt  to  perpetuate  the  old  svstem  was  made  The  Black 

Death 

after  the  terrible  epidemic  known  as  the  "  Black  Death  " 
(1348),  which  carried  off  from  one-third  to  one-half  of  the 
population  of  the  country.  As  a  result  of  this  frightful  mor- 
tality lai)our  became  scarce  and  dear.  Rather  than  pay  the  high 
money  wages  demanded,  the  lords  of  manors  and  the  king 
united  in  the  attempt  to  compel  the  villeins  to  make  the  same 
labour  return  in  exchange  for  their  allotments  as  under  the  old 
service  system.  "  Statutes  of  Labourers  "  ordering  workmen 
to  accept  the  customary  wages  were  passed  in  1351,  and  subse- 
quent years,  but  they  seem  to  have  had  little  practical  effect. 
The  Peasants'  Revolt  in  1381  seems  to  have  been  in  part  due 
to  the  bitter  feeling  engendered  by  these  statutes,  and  though 
not  immediately  successful,  it  helped  forward  the  transition 
from  older  conditions  to  newer  ones  which  were  more  favour- 
able to  labour.  The  onerous  labour  dues  required  of  villeins 
had  been  so  far  given  up  by  1400  that  the  succeeding  century 
has  been  styled  "  the  golden  age  of  the  English  labourer." 

The  same  cause  which  made  possible  the  introduction  of  a  Enclosures 
money  economy  stimulated  another  tendency  that  was  on  the 
whole  advantageous,  the  enclosure  of  lands  that  had  previously 
been  allotted  to  villeins  or  held  in  common  and  their  transfor- 
mation into  great  sheep  ranches.  The  higher  the  price  of  wool 
the  greater  the  profit  to  be  reaped  by  the  lord  of  the  manor 
from  converting  his  whole  estate  into  a  sheep  run.  When,  by 
the  Black  Death,  the  dearness  of  labour  was  added  to  the  deaf- 
ness of  wool  as  an  inducement  in  this  direction,  "  enclosing 


>» 


■  8        Rise  of  Modern  Industry  in  England 

proceeded  at  a  rapid  rate,  with  the  resuU  that  agricultural  land 
came  more  and  more  to  be  private  property  as  it  is  now  under- 
stood in  the  United  States. 
The  New  As  a  consequence  of  these  changes,  and  others  of  subordinate 

System  interest,  English  rural  life  had,  by  the  beginning  of  the  six- 

teenth century,  assumed  something  of  its  modern  character. 
The  cultivators  of  the  soil  continued  to  produce  for  themselves 
most  of  the  commodities  they  consumed,  but  no  longer  under  a 
system  of  joint  labour.  They  still  raised  about  the  same  crops, 
but  there  was  not  the  dull  uniformity  of  the  earlier  period,  and 
some  improvement  in  methods  had  been  made.  In  each  agri- 
cultural district  market  towns  had  grown  up  to  which  farmers 
brought  such  of  their  products  as  were  saleable  and  where  they 
bought  some  of  the  commodities  they  could  not  produce  advan- 
tageously for  themselves.  They  paid  money  rents  for  their 
lands  and  if  they  worked  for  others  received  mone}-  wages  as 
their  compensation. 

The  changes  in  the  towns  were  as  marked  as  those  in  the 
country.  With  the  strengthening  of  the  central  government, 
the  guilds,  and  especially  the  merchant  guilds,  were  deprived  of 
one  of  the  chief  objects  of  their  existence,  that  is,  the  protec- 
tion of  their  members.  Moreover,  trade  had  become  so  much 
more  extensive  and  important  that  the  practice  of  giving  asso- 
jiations  with  limited  membership  monopolies  of  its  different 
branches  was  felt  to  be  inexpedient.  The  loss  of  their 
monopoly  privileges  was  fatal  to  the  merchant  guilds  as  indus- 
trial organisations,  and  those  which  continued  in  existence  be- 
came mere  social  or  religious  clubs. 

The  craft  guilds  survived  for  a  longer  period,  but  many  of 
their  functions  also  were  assumed  by  the  national  government 
and  the  scope  of  their  influence  was  narrowed.  The  immigra- 
tion of  foreign  artisans  was  also  a  circumstance  tending  to 
lessen  their  importance,  though  they  did  not  relinquish  their 
monopolies  without  vigorous  and  in  some  cases  prolonged  re- 
sistance. By  1600  the  guilds  had  ceased  to  be  the  dominant  in- 
fluence shaping  town  life. 
Contribut-  The  most  marked  characteristic  of  the  period  which  suc- 
ing  Causes  qqq(^q^  ^as  national  regulation  of  industry.  This  was  ushered 
in  by  a  series  of  events  which  can  be  only  mentioned  in  passing. 


The  National  System  9 

The  accession  of  Henry  VII.  to  the  throne  in  1485  gave  the 
country  a  strong  ruler  just  at  a  ';inie  when  protracted  civil  war 
had  prepared  the  people  for  sweeping  changes.  The  central- 
ising policy  which  he  inaugurated  was  continued  by  Henry 
VIII.  and  Elizabeth,  neither  of  whom  lost  an  opportunity  to 
substitute  national  for  local  control  and  regulation.  These 
changes  were  favoured  by  the  invention  of  printing,  which  fos- 
tered the  national  literature,  and  by  the  discovery  of  America 
and  of  the  ocean  route  to  the  Orient,  which  stimulated  the 
national  ambition.  Henry  VIII. 's  quarrel  with  the  Pope,  on 
the  subject  of  his  divorce,  severed  the  religious  bond  that  at- 
tached England  to  the  Continent.  In  becoming  head  of  the 
Church  as  well  as  head  of  the  State,  Henry  did  much  to  exalt 
the  importance  of  the  crown  in  the  eyes  of  his  subjects. 
Through  these  influences  national  life  was  stimulated  and 
reliance  on  the  general  government  increased.  The  result  was 
the  industrial  organisation  which  for  lack  of  a  better  name 
may  be  described  as  the  "  National  System." 

§  6.  The  extent  to  which  the  general  government  under-  The 
took  to  regulate  industry  in  England  in  the  time  of  the  gys^g^f 
Tudors  is  to-day  hardly  credible.  We  are  so  accustomed  to 
the  idea  that  the  state  should  interfere  as  little  as  possible  with 
business  that  the  contrary  system,  in  which  regulation  is  relied 
iipon  usually  and  competition  only  under  exceptional  circum- 
stances, is  difficult  to  imagine.  And  yet  this  was  the  condi- 
tion until  comparatively  recent  times  in  England  and  in  most 
European  countries. 

The  practice  of  the  Tudor  sovereigns  was  not  diflerent  in 
principle  from  that  of  their  predecessors.  Henry  III.,  for 
example,  caused  an  "  Assize  of  Bread  and  Ale  "  to  be  issued  in 
1267,  which  prescribed  standard  weights  for  the  farthing  loaf 
of  bread,  varying  with  the  price  of  wheat,  and  required 
municipal  authorities  throughout  England  to  enforce  the  regu- 
lation. Even  before  this  an  "  Assize  of  Cloth,"  issued  in  1197 
by  Richard  I.,  had  declared  that  all  woollen  cloth  made  in  Eng- 
land should  be  twenty-four  ells  *  in  length,  and  had  appointed 
inspectors  or  "  aulnagers,"  to  confiscate  pieces  falling  below 
this  standard.     But  the  Tudors  established  and  maintained  for 

*  An  ell  was  forty-five  inches. 


lo      Rise  of  Modern  Industry  in  England 

more  than  a  century  a  strong  central  government  and  enforced, 
as  had  no  earher  sovereigns,  their  national  regulations. 
Debase-  Henry  VIII. 's  arbitrary  modifications  of  the  monetary  sys- 

the  Coinase  t^"""*  made  when  he  was  hard  pressed  for  revenue,  illustrate  a 
bad  phase  of  national  regulation.  On  two  different  occasions, 
under  cover  of  effecting  a  recoinage  of  the  worn  and  mutilated 
money  of  the  country,  he  caused  the  silver  coins  in  circulation 
to  be  withdrawn  and  put  out  in  their  place  coins  which  not 
only  were  lighter  in  weight,  but  contained  a  smaller  proportion 
of  silver.  Under  his  successor,  Edward  VI.,  this  policy  of 
debasement  was  carried  so  far  that  for  a  time  the  standard 
coin  contained  only  one  part  of  silver  to  three  parts  of  alloy. 
A  modern  government  might  carry  through  such  a  policy  once, 
but  the  attempt  to  repeat  it  three  or  four  times  within  a  few 
years  would  certainly  precipitate  a  revolution. 
Statute  of  Under  Elizabeth,  governmental  regulation  took  a  happier 
tices  turn.     More  politic  than  her  father,  she  was  never  led  by  lack 

of  revenue  to  disregard  so  completely  the  nation's  interests. 
The  most  important  piece  of  industrial  legislation  of  her  reign 
was  the  "  Statute  of  Apprentices,"  enacted  in  1563.  This  com- 
prehensive measure  undertook  to  regulate  the  relations  between 
masters  and  their  journeymen  and  apprentices  with  the  same 
minuteness  that  was  characteristic  of  the  guilds.  "  It  made 
labour  compulsory  and  imposed  on  justices  of  the  peace  the 
duty  of  meeting  in  each  locality  once  a  year  to  establish  wages 
for  each  kind  of  industry.  It  required  a  seven-years'  apprentice- 
ship for  every  person  who  should  engage  in  any  trade;  estab- 
lished a  working  day  of  twelve  hours  in  summer  and  during 
daylight  in  winter ;  and  enacted  that  all  engagements,  except 
those  for  piece  work,  should  be  by  the  year,  with  six  months' 
notice  of  a  close  of  the  contract  by  either  employer  or 
employee.  "  *  Besides  these  general  regulations  it  contained 
others  of  a  more  special  character,  the  enforcement  of  which 
would  have  left  very  little  scope  to  competition  to  determine 
any  of  the  relations  between  workmen  and  their  employers. 
Monopolies  Another  form  of  interference  with  industry  very  common 
during  the  reign  of  Elizabeth  was  the  granting  of  monopolies. 
The  most  defensible  were  the  great  trading  monopolies,  such 
*  Cheyney,  Indus  trial  and  Social  History  of  England,  p.  156. 


The  Mercantile  System  1 1 

as  the  "  East  India  Company,"  chartered  in  1600,  which  had  to 
incur  very  heavy  expenses  in  estabHshing  trade  with  distant 
lands  and  could  hardly  hope  to  recover  the  sums  invested  un- 
less protected  by  a  monopoly,  at  least  for  a  term  of  years.  But 
other  monopolies  were  granted  with  equal  readiness.  Among 
the  articles  whose  production  and  sale  were  thus  restricted  to 
particular  individuals  towards  the  close  of  Elizabeth's  reign 
were  currants,  salt,  iron,  powder,  playing  cards,  calf-skins, 
hides,  potash,  vinegar,  coal,  steel,  aqua  vitze,  brushes,  bottles, 
saltpetre,  lead,  oil,  glass,  paper,  starch,  sulphur,  and  new 
drapery.  Even  the  personal  popularity  of  Elizabeth  did  not 
prevent  an  outbreak  when  this  list  was  read  in  Parliament,  and 
she  was  forced  to  promise  to  revoke  some  of  the  more  ob- 
noxious grants. 

§  7.  Consistent  with  this  treatment  of  industries  carried  The 
on  in  England  was  the  policy  towards  foreign  trade  known  as  System 
the  "  Mercantile  System,"  which  was  pushed  to  the  greatest 
lengths  during  the  seventeenth  century.  The  central  idea  of 
this  system  was  that  the  sure  index  of  increasing  national 
wealth  is  an  increasing  national  supply  of  the  precious  metals. 
In  harmony  with  this  view  it  was  held  to  be  the  essence  of 
sound  commercial  policy  to  export  commodities  of  high  value 
and  to  import  in  return  commodities  of  low  value  plus  specie. 
The  difference  in  value  between  commodity  exports  and  im- 
ports was  called  "  the  balance  of  trade,"  and  a  balance  on  the 
side  of  exports  was  styled  "  favourable "  because  it  was 
thought  to  entail  an  importation  of  gold  or  silver. 

One  of  the  most  obvious  regulations  dictated  by  mercantilist 
theory  was  the  prohibition  of  the  export  of  the  precious  metals. 
Such  a  regulation  had  been  enacted  in  England  as  early  as 
1 38 1  and  it  was  continued  as  regards  English  coin  until  so  late 
a  date  as  181 6.  To  encourage  the  exportation  of  commodities, 
bounties  were  frequently  paid,  such  as  the  famous  corn  bounty 
introduced  during  the  reign  of  William  III.,  in  1689,  and 
continued  until  England  ceased,  even  in  years  of  abundant 
harvests,  to  be  an  exporter  of  the  grains.  To  discourage  im- 
ports— except  gold  and  silver — a  great  variety  of  measures 
were  resorted  to,  ranging  all  the  way  from  low  duties  to  abso- 
lute   prohibitions.      Discriminating    duties    on    imports    from 


12      Rise  of  Modern  Industry  in  England 

certain  countries,  such  as  France,  trade  with  which  showed 
normally  an  unfavourable  balance,  were  also  common.  Closely 
related  to  these  trade  regulations  was  the  colonial  policy  ap- 
proved by  the  thought  of  the  age.  The  mother  country  sought 
to  limit  the  industries  of  her  colonies  to  the  production  of  raw 
materials  and  to  monopolise  the  trade  consisting  in  the  impor- 
tation of  these  materials  and  the  exportation  to  them  of  needed 
manufactured  articles. 

Other  examples  of  governmental  interference  might  be  given^ 
but  enough  has  been  said  to  indicate  how  completely  every 
department  of  industrial  activity  was  subject  to  governmental 
regulation.  The  place  of  the  local  regulations  which  lost  their 
force  with  the  decline  of  the  manorial  and  guild  systems  was 
largely  filled  by  these  new  national  regulations,  and  the  field 
left  to  individual  enterprise  and  competition  was  still  very 
restricted.  Only  gradually  did  the  conviction  dawn  in  the 
minds  of  English  statesmen  that  free  competition  is,  for  many 
relations  of  industrial  life,  a  more  effective  regulator  than  gov- 
ernment inspectors,  backed  though  they  be  by  the  whole  power 
of  government  police.  This  conviction  did  not  bear  fruit  in  a 
modification  of  national  policy  until  after  what  has  been  styled 
the  "  industrial  revolution." 

T^^  8  8.  In   1 7 so  England's  industrial  future  was,  to  sav  the 

Industrial       ,  i  ,  •     i       tt        •  •     i  •  j     ,"•    • 

Revolution     least,   problematical.     Her   iron   industry   was   in   a   declining 

state  in  consequence  of  the  destruction  of  her  forests,  from 
which  the  charcoal,  still  used  in  smelting  iron  ore,  was  obtained. 
Coal  mining  was  becoming  more  and  more  costly  because  of 
the  difficulty  of  keeping  the  mines  free  from  water.  Manu- 
facturing still  retained  its  etymological  significance  of  "  mak- 
ing by  hand"  {niami,  facere),  and  England  was  little  more 
favourably  situated  than  other  countries  to  develop  textile  and 
other  manufactures  by  hand  processes.  In  agriculture  much 
progress  had  been  made  since  the  sixteenth  century,  but  the 
smallness  of  the  country  precluded  any  great  development 
along  agricultural  lines.  Finally,  the  country  was  on  the  eve 
of  a  great  struggle  with  France  to  determine  which  should  be 
the  dominant  power  in  America  and  India,  and  this  struggle- 
might  well  cause  anxiety  in  England,  since  France  was  larger 
in  area  and  three  times  as  large  in  population.     In  the  light  of 


Mechanical  Inventions  13 

this  situation  no  one  would  have  ventured  in  1750  to  predict 
for  England  the  marvellous  growth  which  she  was  about  to 
experience. 

The  new  factors  which  started  the  industrial  revolution  Mechanical 
before  the  end  of  the  eighteenth  century  and  made  England  °^^°  *^°^ 
for  the  greater  part  of  the  nineteenth  the  leading  manufactur- 
ing country  of  the  world,  were  inventions  which  brought  about 
the  substitution  of  power  machinery  for  hand  labour  in  many 
fields  of  industry  and  enabled  England  to  utilise  on  a  great 
scale  her  magnificent  coal  and  iron  resources.  Of  these  the 
most  important,  although  not  the  earliest,  were  James  Watt's 
improvements  in  the  steam  engine.  His  single-acting  pump- 
ing engine  was  patented  in  1769  and  his  double-acting 
machinery-propelling  engine  in  1782.  The  first  was  applied 
to  work  a  bellows  in  an  iron  foundry  even  before  it  was  set 
up  in  1777  to  pump  out  a  Cornish  coal  mine.  In  both  con- 
nections it  proved  incomparabh'  superior  to  the  Newcomen 
engine  which  it  superseded.  The  double-action  engine  was 
first  employed  to  run  a  cotton  mill  in  1785,  and  that  date  marks 
the  turning  point  in  England's  history  as  a  manirfacturing 
country.  In  its  use  to  furnish  a  blast  for  smelting  iron  ore 
by  moans  of  bituminous  coal  the  steam  engine  cheapened 
machinery ;  in  its  use  to  keep  coal  mines  free  from  water  it 
cheapened  fuel ;  finally,  in  its  use  to  propel  cheap  machinery  by 
the  aid  of  cheap  coal  it  enabled  English  manufacturers  to  under- 
sell all  competitors  in  foreign  markets. 

By  itself  the  steam  engine  did  not  accomplish  this  result,  Spinning 
since  the  machines  which  it  was  to  propel  had  also  to  be  in- 
vented. In  1750  both  spinning  and  weaving  were  hand 
processes,  and  even  before  Watt  was  occupied  with  his 
engines  other  inventors  had  been  busied  with  the  question 
of  substituting  power  machinery  for  hand  labour  in 
these  industries.  Tlie  first  improvements  displaced  the  old- 
fashioned  spinning  wheel.  In  1764,  or  thereabouts,  a  poor 
weaver  by  the  name  of  James  Hargreaves  devised  the  "  spin- 
ning jenny,"  or  multiple  spinning  wheel.  About  the  same  time 
other  inventors  hit  upon  the  idea  of  spinning  by  means  of 
rollers.  Richard  Arkwright,  a  barber,  made  a  commercial 
success  of  this  process  with  his  "  water  frame,"  patented  in 


Weaving 


Steam 
Transpor- 
tation 


14      Rise  of  Modern  Industry  in  England 

1769.  In  1779  Samuel  Crompton,  another  weaver,  combined 
these  new  processes  in  his  "  spinning-  mule  "  and  thereby  gave 
to  power  spinning  something  of  its  present  efficiency. 

Power  weaving  was  perfected  less  rapidly.  The  Rev. 
Edmund  Cartwright  invented  the  first  power  loom  in  1785,  but 
it  was  not  until  after  1800  that  it  began  to  displace  to  any  con- 
siderable extent  the  old  weaving  frame.  About  the  same  time 
that  Cartwright  made  his  invention,  Henry  Cort,  an  iron  and 
steel  manufacturer,  devised  the  puddling  process  for  trans- 
forming pig  into  malleable  iron,  and  machinery  for  rolling  the 
latter  into  bars  of  convenient  size  for  further  manufacture.  By 
the  end  of  the  century  the  use  of  water  and  steam  power  in 
place  of  hand  and  foot  power  was  beginning  to  make  its  way 
into  every  important  branch  of  English  manufacturing,  and 
the  latter  term  was  coming  to  have  its  present  meaning  of 
"  making  by  machinery." 

The  industrial  revolution  \^as  not  fully  consummated  until 
the  same  power  which  had  transformed  manufacturing 
processes  was  applied  to  transportation.  Robert  Fulton's  in- 
vention of  a  successful  steamboat  in  1807  was  the  first  step  in 
this  direction.  It  was  not,  however,  until  1838  that  the  first 
steamship  crossed  the  Atlantic,  and  it  is  only  in  our  own  day 
that  ocean  freights  are  beginning  to  be  moved  predominantly 
by  the  power  of  steam.  The  invention  of  the  locomotive  by 
Robert  Stephenson  in  181 4  made  possible  the  application  of 
steam  power  to  land  transportation.  The  first  English  railroad 
was  opened  for  traffic  in  1825  and  placed  England  more  than 
a  decade  in  advance  of  other  European  countries  in  her  utilisa- 
tion of  this  important  aid  to  industrial  development.  Cheap- 
ened means  of  transportation  contributed  quite  as  much  as 
cheapened  processes  of  manufacture  to  the  marvellous  growth 
of  England's  industries  during  the  last  century.  They  enabled 
her  to  ship  her  goods  to  the  most  remote  quarters  of  the  world 
and  to  import  in  exchange  the  cotton,  wheat,  and  other  raw 
materials  for  whose  production  she  was  less  well  adapted  than 
for  manufacturing.  Thus  these  applications  of  steam  power 
multiplied  many  fold  the  advantages  which  England  derived 
from  her  abundant  supplies  of  coal  and  iron  and  helped  to  con- 
firm her  possession  of  the  title  of  "  mistress  of  the  sea,"  which 


The  Laisscz-fairc  Policy  15 

she  had  acquired  towards  the  close  of  the  seventeenth  cen- 
tury. 

§  9.  One  of  the  principal  effects  of  the  industrial  revo-  'J  he 
lution  was  a  radical  change  in  governmental  policy  in  Eng-  y^^.^^'^' 
land.  As  one  invention  followed  another  industrial  conditions  Policy 
were  so  modified  that  the  old  regulations  ceased  to  be  effectual. 
Specifications  in  regard  to  the  qualities  and  the  prices  of  goods 
were  obviously  inapplicable  when  methods  and  costs  of  produc- 
tion were  changing  so  rapidly.  Equally  futile  were  rules  in 
regard  to  periods  of  apprenticeship  and  rates  of  wages. 
Realisation  of  this  fact  came  only  gradually  to  members  of  Par- 
liament, and  it  was  several  years  after  Adam  Smith  formulated 
the  arguments  against  governmental  regulation  and  interfer- 
ence that  have  now  become  classic  before  the  policy  of  non-inter- 
ference or  laissez-jaire  was  adopted.  In  his  "  Inquiry  into  the 
Nature  and  Causes  of  the  Wealth  of  Nations,"  *  published  in 
1776,  Adam  Smith  describes  this  policy  as  follows:  "  All  sys- 
tems, either  of  preference  or  restraint  .  .  .  being  taken  away, 
the  obvious  and  simple  system  of  natural  liberty  establishes 
itself  of  its  own  accord.  Every  man,  as  long  as  he  does  not 
violate  the  laws  of  justice,  is  left  perfectly  free  to  pursue  his 
own  interest  in  his  own  way,  and  to  bring  both  his  industry 
and  capital  into  competition  with  those  of  any  other  man  or 
order  of  men.  .  .  According  to  the  system  of  natural  liberty, 
the  sovereign  has  only  three  duties  to  attend  to ;  .  .  .  first,  the 
duty  of  protecting  the  society  from  the  violence  and  invasion  of 
other  independent  societies ;  secondly,  the  duty  of  protecting, 
as  far  as  possible,  every  member  of  the  society  from  the  injus- 
tice or  oppression  of  every  other  member  of  it,  or  the  duty  of 
establishing  an  exact  administration  of  justice  ;  and,  thirdly,  the 
duty  of  erecting  and  maintaining  certain  public  works  and  cer- 
tain public  institutions,  which  it  can  never  be  for  tlie  advan- 
tage of  any  individual  or  small  number  of  individuals  to  erect 
and  maintain ;  because  the  profit  could  never  repay  the  expense 
to  any  individual  or  small  number  of  individuals,  though  it 
may  frequently  do  much  more  than  repay  it  to  a  great  societv." 

The  conversion  of  a  majority  of  the  members  of  Parliament  Abolition 

to  belief  in  the  laissez-faire  policv  in  reference  to  wasfes,  ap-  °^  Restric- 

&    '     f    tions 

♦End  of  Chapter  IX.,  Book  IV. 


l6       Rise  of  Modern  Industry  in  England 

prenticeship,  and  the  other  matters  regulated  by  the  Eliza- 
bethan Statute  of  Apprentices  occurred  during  the  closing 
years  of  the  struggle  against  Napoleon.  In  1811  a  Select  Com- 
mittee of  the  House  of  Commons  reported  that  "  no  interfer- 
ence of  the  legislature  with  the  freedom  of  trade,  or  with  the 
perfect  liberty  of  every  individual  to  dispose  of  his  time  and  his 
labour  in  the  way  and  on  the  terms  which  he  may  judge  most 
conducive  to  his  own  interest,  can  take  place  without  violating 
general  principles  of  the  first  importance  to  the  prosperity  and 
happiness  of  the  community."  Acting  upon  this  view  in  1813, 
Parliament  responded  to  a  petition  demanding  the  enforcement 
of  the  clause  of  the  Statute  of  Apprentices  which  required  jus- 
tices of  the  peace  to  fix  wages,  by  repealing  that  part  of  the 
law.  Its  attention  was  next  directed  to  the  apprenticeship 
clause  of  the  Act,  and  in  the  following  year,  notwithstanding 
the  opposition  of  many  workingmen,  it  also  was  repealed. 
Other  legal  restrictions  were  removed  in  subsequent  years 
(e.  g.,  the  East  India  trade  was  made  free  in  1813;  the  restric- 
tions on  emigration  were  abolished  in  1824;  restrictive  features 
of  the  poor  law  were  amended  in  1834)  and  the  way  was  pre- 
pared for  the  repeal  of  the  tariff  restrictions  on  foreign  trade 
finally  efifected  in  1846.  With  that  measure  the  last  vestige 
of  the  policy  of  national  regulation  devised  by  the  statesman- 
ship of  Elizabeth  and  her  successors  disappeared.  It  would  be 
a  mistake  to  conclude,  however,  that  the  laissez-faire  policy  was 
ever,  even  for  a  few  years,  in  full  operation  in  England.  As 
old  regulations  were  abolished,  humanitarian  considerations 
secured  the  enactment  of  new  ones  designed  less  to  further  the 
interests  of  business  than  to  protect  the  weaker  classes  in  the 
community,  children  and  women,  from  overwork  under  in- 
sanitary conditions.  These  new  regulations,  factory  and  work- 
shop laws,  as  they  are  called,  have  now  assumed  an  importance 
which  entitles  them  to  separate  consideration.* 
Rise  of  §   10.  The  substitution  of  expensive  power  machinery  for 

System  ^^^  simple  tools  and  implements  previously  used  in  all  branches 

of  industry  ushered  in  the  present  "  factory  system."  The 
leading  characteristics  of  this  system  are  so  familiar  that  it  will 
be  necessary  merely  to  indicate  the  changes  which  it  made  in 

*  Cf.  Chapter  XXII. 


Effects  of  Factory  System  17 

the  situation  of  tlie  labouring  population  of  England.  Previous 
to  the  industrial  revolution  it  was  customary  for  artisans  to 
.  own  their  tools  and  to  carry  on  their  work  either  in  their  own 
homes  or  in  small  adjacent  shops.  The  master  workman  was 
assisted  by  a  few  journeymen  and  apprentices,  but  in  most 
trades  there  was  no  wide  gulf  between  him  and  them.  All  be- 
longed to  the  same  social  class.  The  work  done  was  more 
often  to  meet  orders  given  in  advance  than  to  supply  the  gen- 
eral market,  and  consequently  the  risk  of  loss  through  mis- 
directed production  was  small.  In  some  trades,  and  notably 
in  the  textile  industry,  a  class  of  middlemen  had  arisen  who 
sui)plie(l  the  raw  material  to  artisans  and  paid  them  at  stipu- 
lated rates  for  turning  it  into  finished  products.  This  arrange- 
ment relieved  artisans  of  the  trouble  of  seeking  their  own 
raw  material  and  of  dealing  directly  with  consumers, 
but  it  did  not  alter  materially  their  relation  to  their  work  or  to 
those  who  assisted  them.  Still  another  characteristic  of  the 
time  was  the  practice  of  combining  two  or  three  occupations. 
The  families  of  farm  labourers  usually  had  spinning  wheels, 
and  added  to  the  family  income  in  winter  by  making  yarn. 
Weavers'  families,  on  the  other  hand,  usually  had  garden 
patches  about  their  homes,  and  produced  for  themselves  in 
summer  much  of  the  food  which  they  required.  In  these  ways 
the  dependence  of  different  families  and  of  different  localities 
upon  single  industries,  which  is  so  characteristic  of  the  present 
organisation  of  industry,  was  lessened. 

The  introduction  of  power  machinery  broke  up  these  simple  Effects  of 
arrangements.  To  use  such  machinery  economically  it  was  systenf 
necessary  to  employ  dozens,  even  hundreds,  of  hands  under  the 
same  roof.  Moreover,  the  machinery  and  the  factory  build- 
ing, in  which  it  w^as  installed,  were  too  costly  to  be  owned  by 
the  workers  themselves.  Their  use  brought  forward  a  new 
class  of  "  capitalist  employers,"  who  were  w'idely  separated 
from  their  employees,  and  were  apt  to  look  upon  the  latter  very 
much  as  they  looked  upon  the  material  instruments  of  produc- 
tion which  they  employed.  Finally,  the  new  machine  processes 
of  production  called  for  different  industrial  qualities  than  those 
which  had  been  at  a  premium  when  production  was  mostly  by 
hand.     Tlie  skill  of  the  master  craftsman  was  now  matched 


i8      Rise  of  Modern  Industry  in  England 

and  even  excelled  by  the  quickness  of  the  child  who  fed  an 
automatic  machine.  As  a  consequence  whole  classes  of  the 
population,  which  were  previously  in  comfortable  circum- 
stances, were  deprived  of  their  ability  to  earn  even  a  bare  sub- 
sistence, and  other  classes,  for  whose  labour  there  had  been 
little  demand,  found  their  position  much  improved.  A  further 
result  of  the  introduction  of  power  machinery  was  a  change  in 
the  location  of  industrial  centres.  From  an  early  period  the 
eastern  and  southern  counties  of  England  had  been  the  seats 
of  the  country's  principal  industries.  But  both  water  power 
and  coal  were  lacking  in  these  regions  while  found  in  abund- 
ance in  the  northern  and  western  counties.  The  result  w^as  a 
great  shifting  of  industries  to  the  latter.  This  shifting  of  the 
centres  of  industry  imposed  terrible  hardships  upon  the  sec- 
tions which  were  waning  in  industrial  importance,  from  the 
consequences  of  which  some  of  the  counties  of  England  have 
not  even  yet  entirely  recovered. 

The  cheapened  processes  of  production  which  were  so  ad- 
vantageous to  the  country  as  a  whole,  were,  thus,  the  cause  of 
much  suffering  to  the  working  class.  Their  introduction  served 
to  widen  the  gulf  between  employers  and  employees,  to  make 
whole  districts  dependent  for  their  prosperity  upon  the  condi- 
tion of  single  trades,  and  to  encourage  the  employment  of  chil- 
dren and  women,  for  whose  labour  there  had  been  little  demand 
outside  of  the  home  in  the  previous  age.  The  problems  which 
have  arisen  as  a  consequence  of  these  changes  still  press  for  a 
solution,  not  only  in  England,  but  in  all  progressive  countries, 
and  give  perhaps  its  chief  interest  to  the  study  of  economics. 
Conclusion  §  II-  To  sum  up  this  brief  sketch  of  the  rise  of  modern 
industry  in  England :  the  course  of  development  was  from  local 
self-sufficiency  in  industrial  matters  and  local  regulation  to  an 
industrial  organisation  of  national  scope,  in  which  questions  of 
money  and  trade  were  prominent,  and  national  regulation  was 
the  rule.  Only  within  the  last  one  hundred  years  has  the  sys- 
tem of  industrial  freedom  been  adopted.  The  institutions  and 
practices  belonging  to  this  last  stage  of  development,  now  so 
familiar  as  to  seem  unchanging,  are  none  of  them  very  old — 
compared  with  the  age  of  industrial  society — and  are  all  of 
them  on  trial,  and  likely,  in  the  course  of  time,  to  be  found 


Conclusion  19 

unfitted  to  new  industrial  conditions,  and  to  be  discarded  as 
were  the  institutions  of  the  manorial  system  and  the  regulations 
of  the  Elizabethan  period.  Free  competition,  which  seems  to 
the  modern  mind  so  essential  to  the  continuance  of  prosperous 
industrial  activity,  was  almost  unknown  in  mediaeval  England. 
Private  property,  at  least  in  agricultural  land,  hardly  existed  in 
its  modern  form.  The  granting  of  monopolies,  which  is  so 
repugnant  to  the  modern  sense  of  justice,  was  almost  as  com- 
mon in  the  days  of  Elizabeth  as  is  the  incorporation  of  joint- 
stock  companies  to-day.  Present  practices  and  institutions  have 
been  adopted  because  they  suit  the  needs  of  the  time ;  but  as 
surely  as  conditions  are  changing  and  new  needs  are  becoming 
dominant,  practices  and  institutions  must  also  change. 

REFERENCES  FOR    COLLATERAL   READING 

*AsJiley,  English  Economic  History,  2  vols.;  *Cheyney,  Industrial  and 
Social  History  of  England,  Chaps.  I. -VHI.;  Gibhi'ns,  Industry  in 
England;  *Price,  Short  History  of  English  Commerce  and  Indus- 
try; Warner,  Landmarks  in  English  Industrial  History;  Rogers, 
Six  Centuries  of  Work  and  Wages,  and  The  Industrial  and  Com- 
mercial History  of  England;  Ctinningham,  Growth  of  English 
Industry  and  Commerce,  2  vols. 


CHAPTER  II 


THE  INDUSTRIAL  EXPANSION  OF  THE    UNITED   STATES 


Colonial 
Period 


Liberty, 

Private 

Property, 

and 

Equality 


§  12.  The  story  of  the  settlement  of  different  portions  of 
North  America  by  colonists  from  different  lands,  of  the  mag- 
nificent distances,  and  the  differences  in  institutions  and  ideas 
which  long  held  them  apart,  and  of  the  common  interests  and 
the  common  cause,  first  against  the  French  and  Indians,  and 
then  against  the  English,  which  at  last  brought  them  together 
and  cemented  them  into  a  nation  under  the  Constitution  of  the 
United  States,  has  been  too  often  told  to  need  repetition.  From 
its  very  nature,  as  a  new  country  with  unbounded  natural  re- 
sources in  virgin  land  and  forests,  the  United  States  was  pre- 
disposed to  extractive  industries.  The  earlier  settlers  estab- 
lished themselves  along  the  coast  as  farmers  and  Indian  traders. 
As  the  Indians  were  driven  back  into  the  wilderness,  adven- 
turous whites  took  up  the  business  of  hunting  and  trapping, 
and  acted  as  pioneers  in  the  westward  movement  characteristic 
of  the  development  of  the  country  during  the  last  century. 

During  the  seventeenth  and  eighteenth  centuries,  the  Amer- 
ican farmer  made  for  himself  most  of  the  things  that  he  re- 
quired. His  food  was  the  produce  of  his  farm  or  game  from 
the  neighbouring  forest.  For  clothing  he  used  the  skins  of 
animals  and  homespun  cloth.  His  house  was  made  of  rough- 
hewn  logs.  Only  his  gun  and  some  of  his  tools  and  implements 
were  purchased,  and  these  were  mostly  imported  from  Eng- 
land. One  important  branch  of  manufacturing  alone  was  de- 
veloped during  colonial  times,  that  is,  ship-building,  which 
early  established  itself  in  New  England,  and  continued  to  be 
a  leading  industry  in  that  section  until  wooden  vessels  were 
superseded  by  those  of  iron. 

The  industrial  institutions  and  ideas  which  were  fostered  by 
colonial  conditions  may  be  easily  surmised.  Living  in  com- 
parative isolation  and  enjoying  almost  complete  industrial  in- 

20 


Liberty,  Private  Property,  and  Equality     21 

dependence,  the  colonists  came  to  regard  liberty  as  one  of  their 
dearest  possessions.  To  direct  one's  Hfe  and  activities  as  one 
pleased  came  to  be  thought  of  as  an  inherent  right  with  which 
no  such  extraneous  thing  as  government  should  interfere.  The 
abundance  of  free  land  and  the  importance  to  the  first  settlers 
of  extending  the  cultivated  area  as  rapidly  as  possible  so  that 
the  menace  of  Indian  massacre  might  be  pressed  farther  and 
farther  into  the  interior,  made  the  system  of  private  property  in 
land  seem  natural  if  not  inevitable.  From  an  early  period 
settlers  were  permitted  in  nearly  all  of  the  colonies  to  acquire 
on  easy  terms  the  absolute  ownership  of  large  estates.  As  long 
as  equally  promising  land  remained  open  to  the  border  pioneer 
there  seemed  notliing  inconsistent  in  this  policy  with  the  ideal 
of  equality,  which  was  fostered  by  the  similarity  of  the  condi- 
tions under  which  most  families  lived  and  supported  them- 
selves. This  ideal  showed  itself  in  connection  not  only  with 
social  usages,  but  also  with  the  political  organisation  of  the 
country.  Short  terms  and  rotation  in  office,  which  are  charac- 
teristic of  American  public  life,  have  from  the  first  been  de- 
fended in  the  popular  consciousness  on  the  ground  that  any 
good  American  citizen  is  competent  to  serve  his  country  in  any 
capacity. 

Experience  with  the  thefts  and  depredations  of  the  lawless 
characters  that  are  always  found  in  pioneer  communities  made 
the  colonists  peculiarly  alive  to  the  sacredness  of  property.  It 
was  taken  for  granted  that  property  was  justly  acquired,  and 
governmental  machinery  was  largely  devoted  to  protecting  peo- 
ple in  the  use  and  enjoyment  of  their  possessions.  Thus,  in  the 
bills  of  rights  which  were  generally  appended  to  the  constitu- 
tions adopted  by  the  States  after  independence  was  achieved, 
life,  liberty,  and  property  are  characterised  as  the  three  funda- 
mental and  inalienable  rights  of  American  citizens.  In  exalt- 
ing the  rights  of  property  the  colonists  were  not  so  much  breik- 
ing  with  the  institutions  which  they  had  brought  with  them 
from  the  Old  World  as  giving  greater  prominence  to  familiar 
ideals.  By  so  doing  they  paved  the  way  for  an  industrial  civ- 
ilisation which  has  been  marked  thus  far  by  intense  individual- 
ism in  thought  and  practice. 

In  conflict  with  the  ideals  of  liberty  and  equality  was  the 


Slave  vs. 

Free 

Labour 


The 

National 
Industrial 
Ideal 


22    Industrial  Expansion  of  the  United  States 

demand  arising  from  the  abundance  of  fertile  land  for  a  large 
labouring  population.  To  satisfy  this  need  Negro  slavery  was 
early  introduced  into  the  southern  colonies,  where  conditions  of 
soil  and  climate  made  slave  labour  profitable.  The  northern 
colonies  resorted  to  the  system  of  importing  white  servants 
from  Europe  under  contracts  (indentures)  which  required  the 
latter  to  work  for  a  certain  number  of  years  in  return  for  their 
passage  money.  Where  slavery  flourished  labour  itself  soon 
came  to  be  despised  by  the  free  inhabitants,  so  that  slaves,  who 
were  at  first  merely  a  convenience  in  such  sections,  became 
with  the  progress  of  time  an  economic  necessity.  The  system 
of  indentured  labour  had  no  such  serious  consequences.  At 
first,  a  valuable  supplement  to  the  wages  system  which  was 
carried  on  side  by  side  with  it  in  the  northern  colonies,  it  was 
given  up  entirely  early  in  the  nineteenth  century,  when  easier 
ways  were  found  of  securing  from  Europe  the  much-needed 
working  force.  The  diverse  social,  political,  and  economic  ideals 
which  North  and  South  owed  to  their  contrasting  labour  sys- 
tems were  the  root  cause  of  the  attempt  of  the  Southern  States 
to  secede,  and  of  the  terrible  Civil  War  through  which  the 
Union  was  saved  and  through  which,  incidentally,  slavery  was 
abolished.  Since  the  issue  of  the  Emancipation  Proclamation 
in  1863  the  wages  system  has  been  introduced  in  one  form  or 
another  into  all  sections,  until  it  has  become  the  characteristic 
labour  system  of  the  whole  country. 

§  13.  When  the  imited  colonies  declared  their  independence 
of  Great  Britain  and  formed  themselves  into  the  United  States, 
the  industrial  ideal  of  most  of  the  revolutionists  was  an  agri- 
cultural community.  Appreciating  the  vast  extent  of  the 
undeveloped  resources  of  the  country  and  the  superior  advan- 
tages of  England  for  manufacturing,  the  founders  of  the  Re- 
public coimted  upon  a  mutually  advantageous  trade,  consisting 
of  the  exportation  of  raw  products  and  the  importation  of  man- 
ufactured goods,  as  one  of  the  conditions  to  national  prosperity. 
England's  own  policy  had  much  influence  in  giving  a  different 
direction  to  national  ambition.  Through  her  restrictive  meas- 
ures she  made  trade  on  equal  terms  between  the  two  countries 
impossible.  The  result  was  that  even  before  the  Federal  Con- 
stitution was  adopted  some  of  the  states,  such  as  l^Iassachusetts 


The  National  Industrial  Ideal  23 

and  Pennsylvania,  had  entered  vigorously  on  the  policy  of 
developing  home  manufactures.  Through  the  influence  of  the 
representatives  of  these  states  the  first  national  tariff  act,  passed 
in  1789,  contained  distinct  intimations  that  the  building  up  of 
manufactures  within  the  country  was  one  of  the  objects  aimed 
at.  Alexander  Hamilton's  famous  "  Report  on  Manufactures," 
submitted  to  Congress  in  1792,  clearly  presented  and  defended 
the  ideal  of  national  industrial  independence,  and  when  the 
United  States  was  involved  in  1806  in  the  European  struggle, 
which  had  up  to  that  time  redounded  to  its  advantage,  was 
forced  to  ruin  its  own  trade  by  the  "  Embargo  Act,"  and, 
finally,  in  1812,  to  take  up  arms  against  Great  Britain  in  de- 
fence of  its  rights  upon  the  high  seas,  this  idea  had  gained 
many  adherents.  The  tariff  acts  of  1816,  1824,  and  1828  reflect 
clearly  the  new  ambition  to  build  up  all  desirable  industries 
within  the  confines  of  the  United  States,  and  to  reduce  foreign 
trade  from  the  position  of  the  source  of  manufactured  neces- 
sities to  that  of  an  outlet  for  surplus  products.  During  the  first 
three  decades  of  the  nineteenth  century  American  cotton  and 
woollen  manufacturing  was  developed  to  a  point  where  it 
compared  not  unfavourably  with  the  same  industries  in  Great 
Britain.  The  great  inventions,  which  were  described  in  the 
last  chapter,  were  introduced,  and  in  some  cases  improved 
upon,  and  the  water-power  furnished  by  the  swift-flowing 
streams  of  New  England  and  the  Middle  States  was  utilised. 
Iron  and  steel  industries  developed  more  slowly,  owing  to 
ignorance  of  the  coal  and  iron  resources  of  the  country.  Dur- 
ing this  period  the  Southern  States,  which  could  not,  because 
of  their  "  peculiar  institution,"  hope  to  develop  manufactures 
of  their  own,  quite  reasonably  objected  to  paying  the  higher 
prices  needed  to  protect  Northern  manufacturers.  Out  of 
deference  to  the  more  important  slavery  issue,  a  compromise 
was  effected  in  1832  which  resulted  in  lower  protective  duties 
until  just  before  the  outbreak  of  the  Civil  War.  The  with- 
drawal of  the  South  from  representation  in  the  Federal  Govern- 
ment during  that  struggle,  and  the  thinly  veiled  hostility  of 
some  of  the  countries  of  Europe  to  the  side  of  the  North, 
caused  a  great  revival  of  the  ideal  of  national  industrial  inde- 
pendence.   Opinions  differ  as  to  whether  the  protective  tariffs 


Physical 
Character- 
istics of  the 
United 
States 


The 

Atlantic 

Seaboard 


24    Industrial  Expansion  of  the  United  States 

and  other  measures  that  were  adopted  in  the  effort  to  reahse 
this  ideal  have  been  beneficial  to  the  country  as  a  whole.  That 
they  have  been  potent  influences  in  strengthening  the  bonds 
which  united  different  sections,  however,  and  in  fostering  a 
spirit  of  national  as  distinct  from  State  patriotism,  cannot  be 
doubted. 

§  14.  The  purchase  of  the  Louisiana  Territory  from  France 
in  1803  gave  a  new  direction  to  national  ambition.  Hence- 
forth, to  extend  their  settlements  until  they  stretched  from  sea 
to  sea,  became  the  definite  purpose  of  the  people  of  the  United 
States.  The  story  of  the  way  in  which  that  purpose  has  been 
fulfilled  constitutes  the  most  characteristic  chapter  in  the  coun- 
try's history. 

As  rounded  out  by  the  annexation  of  Texas  in  1845  and  the 
subsequent  purchases  from  Mexico,  the  United  States  contains 
nearly  3,cxx),ooo  square  miles  of  territory,  of  which  fully 
2,500,000  square  miles  enjoy  a  summer  climate  suitable  for 
agriculture.  Geographically  this  region  falls  roughly  into  four 
great  divisions.  The  original  colonies  were  confined  between 
the  Atlantic  Ocean  and  the  Appalachian  ?iIountains,  which  ex- 
tend with  but  few  interruptions  all  the  way  from  IMaine  to 
Georgia.  West  of  these  mountains  the  valleys  of  the  Missis- 
sippi River  and  of  the  Great  Lakes  begin,  and  extend  in  an 
unbroken  plain,  embracing  more  than  one-half  of  the  area  of 
the  whole  country,  to  the  foot  of  the  Rocky  Mountains.  From 
the  Rocky  Mountain  range  to  the  Sierra  Nevada  range  in  Cal- 
ifornia and  the  Cascade  range  in  Oregon  and  Washington,  is 
the  third  division  of  the  country,  an  arid  plateau  broken  by 
other  mountain  ranges  and  formerly  designated  as  the  Great 
American  Desert.  West  of  the  Sierra  Nevada  and  Cascade 
mountains,  and  extending  to  the  Pacific  Ocean,  is  the  fourth 
geographical  division.  A  brief  account  of  the  physical  char- 
acteristics of  these  different  sections  will  contribute  to  an  un- 
derstanding of  the  forces  which  have  shaped  the  industrial 
expansion  of  the  country. 

The  region  between  the  Atlantic  Ocean  and  the  Appa- 
lachian Mountains  is  distinguished  by  excellent  harbours  and 
numerous  rivers  and  streams  suitable  for  navigation  and  for 
use  as  sources  of  water-power.     The  land  of  this  section  is 


The  Middle  West  25 

fairly  good  and,  in  consequence  of  the  growth  here  of  many  of 
the  largest  manufacturing  and  commercial  cities  of  the  coun- 
try, has  been  more  highly  cultivated  than  that  of  sections  more 
distant  from  profitable  markets. 

The  Mississippi  Valley  and  the  Valley  of  the  Great  Lakes  The  Middle 
form  the  great  agricultural  section  of  the  United  States.  Be- 
sides being  very  level,  in  consequence  of  glacial  action  at  an 
earlier  period,  this  region  has  a  rich  soil  and  is  well  watered 
by  the  clouds  which  rise  off  the  Gulf  of  Mexico  and  are 
deflected  east  by  the  Rocky  Mountains.  Its  natural  advan- 
tages for  water  transportation  are  even  more  remarkable.  It 
is  estimated  that  the  Mississippi  and  its  tributaries,  the  Ohio 
and  the  Missouri,  are  navigable  for  over  10,000  miles  of  their 
extent,  while  for  nearly  half  that  distance  they  are  large  enough 
to  carry  vessels  of  a  considerable  size.  The  Great  Lakes  offer 
even  better  facilities  for  transportation,  although  over  a  shorter 
course.  As  supplemented  by  the  canals  connecting  Lake 
Superior  with  Lake  Huron  and  Lake  Erie  with  the  Hudson 
River  and  with  Lake  Ontario,  these  great  bodies  of  water  make 
possible  continuous  navigation  for  a  distance  of  more  than 
2000  miles.  As  outlets  for  the  agricultural  and  mineral  prod- 
ucts of  the  Northwest  their  importance  can  hardly  be  over- 
estimated. 

The  western  border  of  the  Mississippi  basin  suffers  from  the 
same  scarcity  of  rainfall  that  has  given  its  name  to  the  Great 
American  Desert,  and  should  really  be  treated  with  that  section 
in  an  economic  classification.  This  arid  region  is  nearly  looo 
miles  wide  at  the  northern  border  of  the  United  States,  but 
narrows  to  500  miles  on  the  Mexican  frontier.  Its  total  area 
is  quite  one-third  that  of  the  whole  country.  The  soil  of  this 
vast  territory  has  been  found  to  be  exceedingly  fertile  in  those 
places  where  artificial  irrigation  can  be  employed,  but  even  the 
most  liberal  estimates  make  such  sections  but  a  fractional  part 
of  the  whole  region.  So  far  as  can  be  foreseen  the  greater 
portion  of  it  must  remain  useful  only  for  its  mineral  deposits 
and  for  cattle  and  sheep  ranching. 

The  country  bordering  on  the  Pacific  Ocean  has  a  character  The  Far 
peculiar  to  itself.     Its  southern  section  enjoys  a  semi-tropical      ^^ 
climate  and  is  suited  to  the  cultivation  of  oranges,  lemons,  figs, 


26    Industrial  Expansion  of  the  United  States 

and  similar  fruits.  A  lower  mean  temperature  adapts  the 
region  farther  to  the  north  and  extending  all  the  way  to  Puget 
Sound,  to  the  growth  of  wheat  and  other  grains.  Unfor- 
tunately this  region  is  markedly  deficient  in  harbours  and  nav- 
igable rivers,  and  for  this  reason,  if  for  no  other,  is  unlikely  to 
attain  as  high  a  stage  of  industrial  development  as  the  Atlantic 
coast  region. 
The  New  Detached  from  the  compact  area  that  has  been  described  are 

the  outlying  territories  more  recently  acquired  by  the  United 
States  by  purchase,  by  annexation,  and  by  conquest.  Of  these 
the  principal  are:  Alaska  (area,  531,000  square  miles),  Hawaii 
(6740  square  miles),  Puerto  Rico  (3600  square  miles),  and 
the  Philippines  (120,000  square  miles).  Alaska  is  valuable  for 
its  mineral  deposits  and  its  fisheries.  The  principal  product  of 
Hawaii  is  sugar,  for  which  there  is  a  ready  and  ample  market 
in  the  United  States.  Puerto  Rico  also  produces  sugar  in  con- 
siderable quantities,  but  its  chief  crops  are  coffee  and  tobacco. 
Both  islands  are  sufficiently  near  the  United  States  to  become 
Americanised,  and  are  valuable  as  coaling  stations  for  the 
nation's  growing  fleet  of  merchant  vessels.  The  chief  products 
of  the  Philippines  are  hemp,  sugar,  copra,  and  tobacco.  The 
first  two  are  much  needed  in  the  United  States,  and  may  be- 
come the  basis  for  an  extensive  trade.  In  addition,  the  islands 
are  said  to  be  richly  supplied  with  minerals  of  dififerent 
kinds. 
Develop-  §  1 5-  The  foreign  complications  in  which  the  country  began 

Transporta-  ^°  ^^  involved  shortly  after  the  acquisition  of  Louisiana  checked 
tion  Facili-  somewhat  its  internal  development  during  the  first  two  decades 
of  the  century.  The  long  period  of  peace  which  ensued  was 
very  favourable  to  the  progress  of  settlement,  and  about  1820 
the  era  of  westward  expansion  began  in  good  earnest.  As 
already  indicated,  the  first  great  obstacle  to  westward  immi- 
gration was  the  Appalachian  Mountains.  Building  roads  over 
these  mountains  and  through  the  dense  forests  which  sur- 
rounded and  covered  them  was  a  task  of  such  seriousness  that 
state  aid  had  to  be  called  in  for  its  accomplishment.  Even  after 
roads  were  built,  travel  continued  to  be  slow,  difficult,  and 
dangerous.  The  need  of  an  easier  route  to  the  Middle  West 
was  keenly  felt,  and  led  to  the  projection  of  the  Erie  Canal  to 


ties 


Growth  of  Railroads  27 

connect  the  Hudson  River  at  Albany  with  the  eastern  end  of 
Lake  Erie.  Tlie  canal  was  completed  and  opened  for  traffic  in 
1825,  and  its  superiority  over  the  rough  wagon  roads  as  a 
means  of  conveying  settlers  and  goods  to  and  from  the  towns 
that  were  springing  up  about  the  Great  Lakes  and  along  the 
Ohio  and  Mississippi  was  immediately  shown  in  the  impetus 
which  it  gave  to  emigration  from  the  Eastern  States. 

While  attention  was  being  given  to  the  building  of  better  Growth  of 
roads  and  of  other  canals  in  different  sections  of  the  country, 
the  railroad  and  steam  locomotive  were  introduced  from  Eng- 
land, the  latter  being  used  for  the  first  time  in  1829.  This  event 
marks  a  turning  point  in  the  history  of  internal  improvements. 
In  a  few  years  there  was  in  progress  a  veritable  stampede  for 
railroad  construction  at  government  expense.  The  States 
vied  with  each  other  to  take  the  lead  in  this  development,  and 
bonds  to  secure  the  needed  funds  were  issued  so  recklessly  that 
by  1845  even  so  rich  a  commonwealth  as  Pennsylvania  was 
brought  to  the  verge  of  bankruptcy.  The  reaction  which  fol- 
lowed was  as  violent  as  had  been  the  original  mania.  Canals 
and  railroads  were  disposed  of  for  a  fraction  of  their  cost  and 
taxation  was  resorted  to  to  make  up  the  deficit.  The  net  result 
of  the  policy  of  internal  improvements  at  State  expense  was 
that  the  country  secured  the  railroads  indispensable  to  its  de- 
velopment at  an  earlier  period  than  would  have  been  possible 
had  conservative  counsels  ruled  at  this  period.  In  comparison 
with  the  229  miles  of  railroads  built  before  1832,  there  were  in 
operation  by  1840,  2818  miles;  by  1850,  9021  miles,  and  by 
i860,  30,626  miles.  Without  the  railroads  the  marvellously 
rapid  settlement  of  the  Mississippi  Valley  could  hardly  have 
taken  place. 

Before  the  outbreak  of  the  Civil  War  plans  had  been  Crossing 
matured  for  the  construction  of  a  transcontinental  railway,  and  ^^^j,  °"^*" 
appeal  had  been  made  for  Federal  aid  to  carry  out  the  project. 
The  idea  was  revived  as  soon  as  the  war  closed,  and  with  the 
aid  of  a  Government  loan  and  a  substantial  grant  of  land  the 
Union  and  Central  Pacific  Railroads  were  finally  connected. 
They  were  opened  for  through  traffic  in  1869,  and  served  as  a 
valuabie  aid  to  the  settlement  of  the  Far  West.  Other  trans- 
continental lines  were  pushed  over  the  Rocky  Mountains  at 


28    Industrial  Expansion  of  the  United  States 

other  points,  and  at  the  close  of  the  century  there  were  six 
different  railroads  crossing  the  country  from  east  to  west, 
and  able  to  convey  passengers  from  New  York  to  San  Fran- 
cisco  in  less  time  than  had  been  required  a  hundred  years 
cariier  to  go  from  New  York  to  Washington.  To  aid  in  the 
building  of  these  roads  the  Federal  Government  made  land 
grants  aggregating  millions  of  acres  and  pledged  its  credit 
for  millions  of  dollars,  nor  was  their  construction  accom- 
plished without  wholesale  corruption  and  misappropriation  of 
funds.  It  must  be  conceded,  however,  that  in  this  case,  as  in  the 
case  of  the  state-aided  railroads,  the  ultimate  benefit  to  the 
material  development  of  the  country  far  exceeded  the  loss  to 
the  public  purse. 

Increase  in        Already,  bv  i86i,  the  railway  mileage  of  the  United  States 
Traffic  J  ^     ^  '  -'  o 

was  equal  to  that  attained  in  1900  by  any  single  European  state. 

In  the  latter  year  the  total  mileage  for  the  United  States  was 
nearly  200,000  miles,  as  compared  with  only  176,000  miles  for 
all  European  countries  taken  together.  The  increase  in  the 
business  of  the  railroads  in  recent  years  has  been  even  more 
remarkable  than  the  increase  in  their  mileage.  In  1885  the 
number  of  passengers  carried  one  mile  by  all  of  the  roads  of 
the  country  was  in  round  numbers  9,000,000,000,  and  the  num- 
ber of  tons  of  freight  carried  one  mile,  49,000,000,000."^  In 
1895  the  corresponding  figures  were  12,600,000,000  and 
88,600,000,000,  indicating  an  increase  in  the  ten  years  of  about 
40  per  cent,  for  passengers  and  95  per  cent,  for  freight.  The 
increase  from  1895  to  1901  was  even  more  striking,  the  totals 
for  the  latter  year  being  17,000,000,000  passenger  miles  and 
147,000,000,000  ton-miles,  representing  a  gain  in  the  six  years 
of  35  per  cent,  in  passenger  and  66  per  cent,  in  freight  traffic. 
When  it  is  considered  that  it  is  good  average  hauling  over  a 
country  road,  for  a  man  and  a  team  to  move  twenty  tons  one 
m.ile  in  a  day,  some  conception  may  be  formed  from  these  fig- 
ures of  the  importance  of  the  service  which  the  railroads  of 
the  country  render.  No  single  fact  so  well  illustrates  the  rapid 
industrial  expansion  of  the  United  States  as  this  remarkable 
development  of  its  transportation  facilities. 

*  These  are  the  units  usually  employed  to  compare  the  businesses  of 
different  transportation  systems.  The  first  is  called  the  "passenger 
mile,"  the  second  the  "  ton-mile." 


The  Foreign  and  Native  Born 


29 


§  16.  The  following  table  shows  the  growth  of  population  by  Growth  of 
decades  from  1790  to  1900:  Population 


Increase, 

Year 

Population 

per  cent. 

1790 

3-929-214 

1800 

5,308,483 

35-1 

iSio 

7,239,881 

36.4 

1820 

9,638,453 

33-1 

1830 

12,866,020 

33-5 

1840 

17,069,453 

32.7 

1S50 

23,191,876 

35-9 

i860 

31,443.321 

35-6 

1870 

38,558,371 

22.6 

1880 

50,155,783 

30.1 

1890 

62,622,250 

24.9 

1900 

75,568,686 

20.7 

These  figures  do  not  include  the  residents  of  the  Indian  Ter- 
ritory, nor  the  populations  of  Alaska,  Hawaii,  Puerto  Rico,  and 
the  Philippines.  The  additions  to  be  made  under  these  heads 
for  1900  make  the  population  of  the  whole  country  about 
85,000,000. 

In  comparison  with  the  rates  at  which  the  populations  of 
other  countries  have  grown  during  the  period  covered,  the 
growth  of  the  United  States  has  been  astonishing.  In  fact, 
history  furnishes  no  parallel  on  an  equal  scale  to  the  increase 
from  1790  to  i860,  when  the  total  population  doubled  three 
times.  The  marked  falling  off  in  the  percentage  of  increase 
since  i860  is  indirect  proof  that  the  chief  incentive  to  the  rapid 
growth  of  the  preceding  years  was  the  abundance  of  fertile  and 
practically  free  land  which  was  open  to  settlement.  It  is  also 
reassuring  to  those  who  feared  lest  the  country  should  be  bur- 
dened with  a  superabundant  population. 

From  the  beginning  of  its  historv  the  United  States  has  each  The 

,  ,  ■  '•  ,     ■         r  ,  ,     Foreign 

year  attracted  large  accessions  to  its  population  from  abroad,  and  Native 

From  1820,  when  statistics  of  immigration  first  began  to  be  ^orn 
kept,  to  1903,  over  21.000.000  immigrants  came  to  the  country. 
The  largest  number  in  a  single  year  previous  to  1903  was 
789,000  in  1882.  The  number  continued  large,  averaging  abotit 
500,000  each  year,  until  1893.  when  it  was  reduced  by  the  in- 
dustrial depression.     The  lowest  number  in  recent  years  was 


30    Industrial  Expansion  of  the  United  States 

reached  in  1898,  when  only  229,000  immigrants  were  reported. 
By  1902  the  number  had  increased  again  to  649,000,  and  in 
1903  it  exceeded  850,000.     No  statistics  of  births  and  deaths 
for  the  country  as  a  whole  are  collected,  so  it  is  impossible  to 
compare  directly  the  "  natural  increase,"  that  is,  the  annual 
excess  of  births  over  deaths  within  the  country,  with  the  in- 
crease due  to  immigration.     Some  notion  of  the  relative  impor- 
tance of  these  two  sources  of  population  is  afforded,  however, 
by  the  census  comparisons  of  the  native  and  foreign  born.    The 
enumeration  for  1900  showed  that  of  the  total  population,  65,- 
800,000,  or  86  per  cent.,  were  native  born,  and  10,500,000,  or 
14  per  cent.,  foreign  born.     During  the  decade  from  1890  to 
1900  the  native  born  increased  22  per  cent.,  while  the  foreign 
born — owing  to  the  marked  falling  off  in  immigration  referred 
to— increased  only  12  per  cent.     The  census  distinguishes  also 
the  native  born  of  foreign  parents.     They  aggregated  in  1900, 
16,000,000,  or  21  per  cent,  of  the  population.     The  native  born 
of  foreign  parentage  and  the  foreign  born  taken  together  con- 
stituted in  1900  over  one-third  of  the  population  of  the  country. 
Another  element  in  the  population  which  is  of  great  sig- 
nificance is  the  Negro.     In  1900  8,840,000  persons,  or  12  per 
cent,  of  the  people  in  the  country,  were  coloured.    This  element 
increased  from  1890  to  1900  18  per  cent.,  while  the  white  popu- 
lation increased  21  per  cent. 
The  Distri-       §  17.  When  the  first  census  was  taken  in  1790,  only  5  per 
bauonof      ^^^^^    ^^  ^j^^  population  was  found  west  of  the  Appalachian 
Population  Mountains.     In  1900  nearly  60  per  cent,  was  so  located.     The 
progress  of  this  westward  expansion  is  indicated  by  the  follow- 
ing statistics:  From  1800  to  1850  the  population  of  the  North 
Atlantic  States  increased  by  225  per  cent.,  and  that  of  the 
South  Atlantic  States  by  105  per  cent.    In  the  same  period  the 
population  of  the  North  Central  States  increased  from  only 
51,000  to  5,400,000,  and  that  of  the  South  Central  from  only 
335,000  to  4,300,000.    In  the  later  years  of  this  period  the  set- 
tlement of  the  Far  West  was  just  beginning  through  the  migra- 
tion of  gold  seekers  to  California.  From  1850  to  1900  the  popu- 
lation of  these  sections  increased  as  follows:  North  Atlantic 
States,   144  per  cent.;  South  Atlantic  States,   123  per  cent.; 
North  Central  States,  387  per  cent. ;  South  Central  States,  22-^ 


23 

i6 

i8 

20 

21 

15 

9 

30 

17 

i3 

68 

43 

34 

29 

18 

34 

II 

39 

23 

25 

146 

6o 

78 

71 

33 

The  Foreign  Born  31 

per  cent.;  Western  States,  from  only  179,000  to  4,100,000. 
The  decennial  rates  of  increase  for  these  different  sections  since 
1850  are  significant : 

Percentages  of  Increase  of  Population 

1850-1860  1860-1870  1870-1880  i88o-i8qo  1890-1900 

North  Atlantic  States, 
South  Atlantic  States, 
North  Central  States, 
South  Central  States, 
Western  States, 

These  figures  show  a  gradual  equalisation  in  the  rates  of 
growth  of  different  sections.  It  may  fairly  be  concluded  from 
them  that  the  westward  movement  of  population  has  about 
come  to  an  end,  and  that  but  for  peculiar  local  conditions 
the  Eastern  States  are  likely  in  future  to  grow  as  rapidly  as  the 
states  west  of  the  Mississippi. 

The  distribution  of  the  Negro  and  foreign-born  elements  in  The 
the  United  States  has  given  rise  to  special  problems  for  the  sec-  ^S^^^^s 
tions  most  affected.  Not  more  than  one-tenth  of  the  Negro 
population  has  withdrawn  from  the  states  where  slavery  flour- 
ished before  the  Civil  War.  In  1900,  in  six  of  these  states — 
Mississippi,  South  Carolina,  Louisiana,  Georgia,  Alabama,  and 
Florida — Negroes  constituted  over  40  per  cent,  of  the  popula- 
tion.   In  all  of  them  the  race  problem  overshadows  all  others. 

The 

The   immigrants   who   came   to   the   United    States   settled  Foreign 

for  the  most  part  in  the  North  and  West.  In  1900  over  86  per  ^^"^ 
cent,  of  the  total  number  were  living  in  the  North  Atlantic  and 
North  Central  States,  and  only  8  per  cent,  in  the  Western 
States.  The  states  in  which  the  foreign-born  constituted  over 
25  per  cent,  of  the  population  in  1900  were:  North  Dakota, 
Rhode  Island,  IMassachusetts,  Minnesota,  Alontana,  Connecti- 
cut, and  New  York.  If  to  the  foreign  born  found  in  these 
states  be  added  the  native  born  of  foreign  parentage,  the  for- 
eign element  is  even  more  conspicuous.  Thus,  in  1900,  persons, 
one  or  more  of  whose  parents  were  foreign  born,  constituted  in 
North  Dakota,  yy  per  cent,  of  the  population ;  in  Minnesota.  75 
per  cent.;  in  Wisconsin,  71  per  cent.;  in  Rhode  Island,  64  per 
cent. ;  in  Massachusetts,  62  per  cent. ;  in  New  York,  59  per 


32    Industrial  Expansion  of  the  United  States 

cent.,  and  in  California,  55  per  cent.     It  goes  without  saying 
that  special  measures  are  needed  in  these  states  to  protect 
American  ideals  and  American  institutions  from  foreign  influ- 
ences. 
Concentra-       Next  to  the  westward  movement,  the  concentration  of  popu- 
P^D  1  f       lation  in  cities  was  the  most  striking  tendency  of  the  last  cen- 
in  Cities        tury.     In  1800  only  4  per  cent,  of  the  people  of  the  country 
lived  in  cities  of  8000  inhabitants  and  upwards.     This  propor- 
tion had  increased  to   12  per  cent,  in   1850.    Since  then  the 
growth  of  cities  has  been  so  rapid  that  they  contained  in  1900 
one-third  of  the  total  population  of  the  country.     A  compli- 
cating  aspect   of   this   growth    of   cities    has   been    the   large 
foreign    element    which    most    of    them    contain.      According 
to  the  census  of  1900  the  161  principal  cities  of  the  country, 
which  contained  26  per  cent,  of  the  total  population,  included 
49  per  cent,  of  the  foreign  born.    In  86  of  these  cities  the  for- 
eign born  constituted  more  than  one-fifth  of  the  total  popula- 
tion, in  24  of  them  more  than  one-third,  and  in  9  more  than 
two-fifths.     This  large  foreign  element  in  American  munici- 
palities has  added  its  share  to  the  economic  and  political  diffi- 
culties with  which  these  rapidly  growing  centres  of  population 
have  had  to  contend. 
Agricultur-       §  1 8.  Agriculture  remains  to-day,  as  it  was  in  the  colonial 
mentofthe  period,  the  dominant  industry  of  the  United  States.    This  has 
United  been  the  natural  result  of  the  extensive  area  of  fertile  land  with 

which  the  country  is  endowed,  and  its  still  relatively  sparse 
population.  Of  its  principal  agricultural  products,  three,  corn, 
white  potatoes,  and  tobacco,  were  indigenous  to  the  New 
World.  The  first,  because  of  the  ease  with  which  it  may  be 
grown  on  new  land,  has  contributed  more  than  any  other 
plant  to  the  material  development  of  the  country.  In  colonial 
days,  corn,  hay,  wheat,  and  potatoes  were  leading  crops  in 
the  North ;  corn,  tobacco,  rice,  and  indigo  in  the  South.  With 
the  invention  of  the  cotton  gin,  a  machine  for  separating 
the  cotton  seed  from  the  cotton  fibre  devised  by  Eli  Whitney 
in  1794,  and  of  spinning  machinery  capable  of  treating  the 
short-fibred  variety  of  cotton  which  alone  flourished  on  the 
mainland,  that  product  began  to  be,  as  it  has  ever  since  re^ 
mained,    "  king "    in    the    Southern    States ;    but    com,    hay^ 


Recent  Changes '  33 

wheat,  and  potatoes  continued  to  be  the  staples  of  the  North. 
As  cities  arose  truck  and  dairy  farming  to  supply  their  needs 
became  profitable.  Meantime  the  pressing-  back  of  the  Indians 
encouraged  the  keeping  of  stock,  since  this  is  practicable  only 
in  localities  where  property  can  be  protected.  Agricultural 
methods,  both  North  and  South,  prior  to  the  Civil  War,  were 
exhausting  to  the  soil,  and  the  wearing  out  of  old  lands  was  a 
strong  incentive  urging  settlers  to  bring  the  superior  soils  of 
the  Mississippi  \^alley  under  cultivation. 

The  cheapness  of  land  and  the  dearness  of  labour  have  been  Invention 
conditions  favourable  to  the  invention  and  use  of  labour-saving  °(j  imple^' 
tools  and  machines.  American  farmers  were  from  the  first  ments 
progressive.  They  were  forced  to  devise  methods  better 
adapted  to  the  conditions  of  a  new  country  than  those  they 
brought  with  them  from  Europe.  The  invention  of  agricul- 
tural machinery  was  especially  stimulated  during  the  Civil  War, 
when  the  labour  supply  became  even  less  adequate  than  before 
to  the  needs  of  the  country.  In  this  period  many  of  the  inven- 
tions were  patented  which  have  made  American  agriculture  so 
different  from  that  of  the  Old  World.  The  tendency  of  these 
improvements  has  been  to  increase  the  productiveness  of 
American  farming  not  so  much  for  each  acre  cultivated  as  for 
each  man  engaged  in  cultivation.  Only  recently  has  attention 
begun  to  be  given  on  any  large  scale  to  the  problem  of  getting 
as  much  as  possible  out  of  each  acre  of  land,  because  only  re- 
cently has  lack  of  land  been  felt  as  a  serious  hardship  by  the 
ambitious  American  farmer. 

Since  the  close  of  the  Civil  War  wheat  cultivation  has  had  a  Recent 
gteat  development  in  the  Northwest ;  the  "  corn  belt  "  has  been 
extended  west  of  the  Mississippi  to  the  very  borders  of  the  arid 
region,  and  in  that  region  itself  cattle,  horse,  and  sheep  grazing 
have  become  important  industries.  The  extension  of  the  "  cot- 
ton belt "  to  include  eastern  Texas,  and  the  rapid  growth  of 
the  fruit  industry  in  Florida  and  California  are  other  changes 
of  comparatively  recent  date.  Meantime  agriculture  in  the 
more  settled  portions  of  the  country  has  become  diversified  and 
rotations  of  crops,  calculated  to  preserve  the  fertile  properties 
of  the  soil,  have  been  introduced.  The  raising  of  small  fruits 
and  the  keeping  of  cows,  whose  milk  is  sold  in  the  city  market. 


Principal 

Agricultur- 
al Products 
of  the  Unit- 
ed States 


34    Industrial  Expansion  of  the  United  States 

or  converted  into  butter  and  cheese,  are  now  chief  interests  to 
Eastern  farmers.  The  present  distribution  of  agricultural 
products  in  the  United  States  is  roughly  indicated  by  the 
accompanying  map. 

§  19.  Among  all  of  the  products  of  the  country  corn  still 
holds  first  place.  Its  relative  importance  in  comparison  with 
other  agricultural  staples  is  shown  by  the  following  table,  based 
on  statistics  published  by  the  United  States  Department  of 
Agriculture : 


Average  Annual 

Average  Annual  Price 

Crop 

of  Total  Crop 

i896-igoo 

1896-1900 

Corn, 

.     2,058,850,000  bu. 

$585,000,000 

Hay, 

58,600,000  tons 

409,000,000 

Wheat,      . 

540,500,000  bu. 

355,000,000 

Cotton, 

9,940,000  bales 

313,000,000 

Oats, 

748,460,000  bu. 

174,700,000 

Potatoes,  . 

209,650,000  bu. 

84,300,000 

Corn  As  the  map  indicates,  the  principal  corn-producing  states 

constitute  a  compact  area,  the  "  corn  belt."  In  1896  seven  of 
these  states — Iowa,  Nebraska,  Illinois,  Kansas,  Missouri,  In- 
diana, and  Ohio — produced  more  than  two-thirds  of  the  coun- 
try's crop.  Since  that  year  the  agriculture  of  these  states  has 
become  more  diversified,  and  corn-growing  has  progressed 
in  other  sections,  but  they  still  produce  more  than  one-half  of 
the  total  crop,  and  depend  in  large  measure  upon  it  for  their 
prosperity. 

Hay  Hay,  the  second  crop  in  importance,  is  produced  in  every 

part  of  the  United  States,  and  cannot  be  said  to  be  localised  in 
any  particular  region.  The  same  is  true  of  potatoes,  and,  in 
less  degree,  of  oats. 

Wheat  The  production  of  wheat  is  also  widespread,  but  the  states 

of  the  Northwest,  Minnesota  and  the  Dakotas,  are  so  depend- 
ent on  this  crop  that  they  are  usually  described  as  the  "  wheat 
belt."  The  average  annual  crops  of  the  years  1896  to  1900  indi- 
cate the  following  order  for  the  leading  wheat-producing 
States  of  the  country:  Minnesota  (61,000,000  bu.).  Kansas 
(53,000,000  bu.).  North  Dakota  (36.000,000  bu.),  California 
(30,000,000  bu.),  Ohio  (30,000,000  bu.),  South  Dakota  (30,- 


MAP  OF  THE   1 

Stowing  approximately  tte  Productive  Areas  ( 


^^/ 


)<^r^. 


D 


^^  iIn  I 


o 


07,/         ( 


1  ^iif -? 


^f'-'^Falir 


A 


O   R   T 


<H 


LIVS 
6T0C 

rr- 


DAIRVINi 


Keprmttii  fivm  the  Keport 


ITED  STATES 

cipal  Agricultural  and  other  Staples,  1901. 


K  f  K.-V.  Knsr..  N  Y 


^>'.    BuitUU   <t/    HUlt.SllcS. 


Development  of  Mining  Industries.       35 

000,000  bu.).     Together  these  six  states  produced  in   these 
years  nearly  one-half  of  the  country's  crop. 

Cotton  is  more  rigidly  confined  to  a  particular  region  than  Cotton 
any  other  important  agricultural  product.  Practically  the  en- 
tire crop  of  the  country  is  raised  in  the  seven  states,  South 
Carolina,  Georgia,  Alabama,  Mississippi,  Louisiana,  Arkansas, 
and  Texas.  In  all  of  them  it  is  the  important  money  crop  of 
most  localities,  and  prosperity  ebbs  and  tiows  according  to  the 
size  of  the  crop  and  the  price.  The  average  annual  production 
in  bales  of  500  pounds  of  these  states  from  1895  to  1899  was 
as  follows:  Texas,  2,500,000;  Georgia,  1,400,000;  Mississippi, 
1,200,000;  Alabama,  960,000;  South  Carolina,  920,000;  Ar- 
kansas, 730,000,  and  Louisiana,  660,000.  A  comparison  of  the 
cotton  crops  of  recent  years  indicates  that  the  centre  of  produc- 
tion moved  westward  down  to  about  1900,  when  there  was  for 
the  first  time  a  smaller  increase  in  the  Texan  crop  than  in  the 
crops  of  the  other  cotton  states. 

Although  the  aggregate  amounts  of  the  three  great  staples, 
corn,  wheat,  and  cotton,  produced  in  the  United  States,  have 
shown  no  tendency  to  diminish,  they  have  not  increased  in 
recent  years  as  rapidly  as  have  the  products  of  minor  branches 
of  agriculture ;  nor  has  agriculture  as  a  whole  developed  at  the 
same  rate  as  mining,  manufacturing,  and  transportation.  If 
the  present  trend  of  development  continues,  it  will  not  be  long 
before  agriculture  has  surrendered  its  place  as  the  country's 
dominant  industry  in  favour  of  manufacturing. 

§  20.  During  the  seventeenth  century  iron  mining  developed  Develop. 
in  a  small  way  in  New  Jersey  and  at  other  points  where  beds  ^Jf"j^„^ 
of  ore  were  discovered.     The  cheapness  of  charcoal  enabled  Industries 
the  Colonies  to  produce  iron,  not  only  for  themselves,  but  for 
export,  until  the  cheaper  process  of  smelting  by  means  of  bitu- 
minous coal  was  invented.     The  Champlain  ore  district  was 
discovered  in  1801,  and  within  a  few  years  developed  into  the 
chief  seat  of  the  iron  industry.     Notwithstanding  the  protec- 
tive duty,  charcoal  iron  competed  at  an  increasing  disadvan- 
tage with  the  imported  bituminous  product  and  the  industry 
languished  until  1839,  when  the  problem  of  smelting  ore  by 
means  of  the  anthracite  coal  that  had  been  discovered  in  Penn- 
sylvania was  successfully  solved.    From  this  time  on  progress 


36    Industrial  Expansion  of  the  United  States 

in  the  iron  industry  was  rapid.  In  1844  T-shaped  rails  were 
first  rolled  in  the  United  States,  and  in  the  same  year  iron  ore 
was  discovered  on  the  shores  of  Lake  Superior.  In  1855  the 
output  of  anthracite  pig  iron  exceeded  for  the  first  time  that 
made  from  charcoal.  The  same  year  saw  the  invention  in  Eng- 
land of  the  Bessemer  process,  introduced  nine  years  later  in 
the  United  States,  and  the  beginning  of  that  wonderful  devel- 
opment which  was  to  transform  the  iron  age  into  the  age  of 
steel.  The  exploitation  of  the  iron  mines  on  Lake  Superior 
proceeded  slowly  until  after  the  close  of  the  Civil  War.  It  was 
not  until  1869  that  the  output  of  bituminous  coal  and  coke  iron 
exceeded  that  made  with  charcoal,  and  not  until  1875  that  it 
exceeded  that  made  with  anthracite  coal,  or  that  the  seat  of 
the  iron  industry  was  definitely  transferred  from  eastern  to 
western  Pennsylvania.  Progress  in  the  iron  and  related  in- 
dustries was  very  rapid  after  1880,  as  is  shown  by  the  following 
statistics  of  iron,  steel,  and  coal  production : 

Quantities  of  Iron,  Steel,  and  Coal  Produced  in  the 

United  States  from  1880  to  igoo 

{In  tons  of  2240  pounds) 

Pig  Iron                      Steel              Anthracite  Coal  Bituminous  Coal 

1880,           3,800,000              1,200,000              28,600,000  38,200,000 

1890,          9,200,000              4,300,000              41,500,000  99,400,000 

1900,        13,800,000            10,200,000              51,300,000  189,700,000 

Iron  Iri  1890  the  United  States  surpassed  Great  Britain  for  the 

and  Coal  first  time  as  a  producer  of  pig  iron,  as  she  had  as  a  producer  of 
iron  ore  twelve  years  earlier.  In  1899  the  United  States  be- 
came also  the  leading  coal-producing  country  of  the  world. 
According  to  a  reliable  estimate  the  United  States  produced  in 
1900  34  per  cent,  of  the  world's  output  of  pig  iron  and  t,"/  per 
cent,  of  its  output  of  steel. 

Practically  the  entire  output  of  anthracite  coal  is  mined  in 
northeastern  Pennsylvania.  That  state  also  leads  in  the  pro- 
duction of  bituminous  coal,  being  credited  in  1900  with  71,000,- 
000  tons,  or  nearly  one-half  of  the  total  output  for  the  country, 
in  comparison  with  23,000,000  tons  for  Illinois,  20,000,000  tons 
for  West  Virginia,  and  17,000,000  tons  for  Ohio.  Nearly  five- 
sixths  of  the  bituminous  coal  produced  in  the  country  is  mined 
east  of  the  Mississippi. 


Gold,  Silver,  and  Copper  37 

The  chief  source  of  iron  ore  continues  to  be  the  iron  ranges 
adjacent  to  Lake  Superior  in  Michigan,  Wisconsin,  and  Min- 
nesota. Together  these  states  produced  in  1900  19,000,000 
tons,  or  more  than  two-thirds  of  the  country's  total  output. 
Other  large  producers  were  Alabama,  Pennsylvania,  and  West 
Virginia.  More  than  five-sixths  of  the  iron  ore  supply  of  the 
country  is  drawn  from  states  east  of  the  Mississippi. 

Next  in  importance  to  coal  and  iron  among  the  mineral  prod-  Gold 
ucts  of  the  United  States  are  the  metals,  copper,  gold,  silver, 
lead,  and  zinc,  and  the  commodities  allied  to  coal,  petroleum 
and  natural  gas.  The  country's  output  of  gold  was  insig- 
nificant until  that  metal  was  discovered  in  California  in  1848. 
According  to  the  statistics  given  by  the  United  States  Mint,  the 
production  of  1853  exceeded  3,000,000  fine  ounces.  It  did  not 
again  attain  that  amount  until  1898,  when  Colorado,  wdth  an 
output  of  over  1,000,000  ounces,  had  become  the  leading  cen- 
tre of  production,  and  California,  Alaska,  South  Dakota,  Mon- 
tana, Arizona,  and  Utah  were  each  contributing  from  100,000 
to  750,000  ounces  annually  to  the  country's  total. 

The  silver  resources  of  the  United  States  did  not  begin  to  be  Silver 
uncovered  before  i860,  when  some  rich  deposits  were  dis- 
covered in  Colorado.  The  maximum  output  was  attained  in 
1892,  when  63,000,000  fine  ounces  were  produced.  Since  that 
year  there  has  been  some  decline  in  the  industry  in  consequence 
of  the  great  fall  in  the  gold  price  of  the  metal.  The  leading 
silver-producing  states  in  1900  were  Colorado,  which  produced 
more  than  one-third  of  the  total  output.  Montana,  which  con- 
tributed about  one-fourth,  Utah,  which  contributed  more  than 
one-seventh,  and  Idaho,  which  contributed  about  one-ninth. 

The  development  of  the  copper  industry  of  the  country  has  Copper 
proceeded  slowly,  although  that  metal  now  stands  next  to  iron 
among  America's  mineral  products.  The  copper  mines  on 
Lake  Superior  in  Michigan,  formerly  worked  by  the  Indians, 
began  production  in  a  small  way  in  1854.  For  nearly  a  gen- 
eration these  mines  were  the  principal  sources  of  supply,  and 
it  was  deemed  necessary  to  protect  the  infant  industry  with  a 
duty  on  imported  copper.  In  the  early  eighties  the  copper  re- 
sources of  Montana  were  discovered,  and  by  1890  that  state 
had  taken  the  lead  as  a  copper  producer.     Next  to  I^Iontana 


a'?8a57 


Petroleum 


Mineral 

Products, 

1900 


38    Industrial  Expansion  of  the  United  States 

and  Michigan  in  copper  production  stand  Arizona,  Colorado, 
and  California.  The  progress  of  copper  production  has  been 
continuous  since  the  close  of  the  Civil  War.  The  output  in 
1870  was  estimated  at  12,600  tons.  By  1880  it  had  increased  to 
27,000  tons;  by  1890  to  116,000  tons,  and  by  1900  to  271,000 
tons.  The  United  States  now  produces  more  copper  than  all 
the  rest  of  the  world  put  together. 

The  production  of  petroleum  dates  from  about  i860.  It  was 
first  discovered  in  western  Pennsylvania,  and  wells  have  since 
been  bored  in  Ohio,  Indiana,  New  York,  West  Virginia,  Col- 
orado, California,  Texas,  and  other  states.  In  1877  the  total 
output  of  the  country  amounted  to  560,000,000  gallons.  Prog- 
ress since  that  year  has  been  steady,  and  in  1900  the  total  out- 
put amounted  to  2,660,000,000  gallons,  of  which  44  per  cent, 
was  exported. 

The  production  of  natural  gas  was  begun  in  1872,  also 
in  western  Pennsylvania.  Pennsylvania,  Ohio,  and  New 
York  are  still  the  principal  sources  of  supply.  The  value 
of  the  natural  gas  output  increased  from  $13,000,000  in 
1895  to  $23,600,000  in  1900,  but  there  are  indications  that  the 
industry  must  be  short-lived. 

The  following  table  indicates  the  relative  importance  of  the 
leading  mineral  products  of  the  United  States  in  1900 : 


Qua!i////es  and   ]^alucs  of 

Mineral  Products  of  the 

U7iited  States 

in 

igoo 

Quantity 

Value 

Coal:  Bituminous  (short  tons), 

212,500,000 

$221,000,000 

Anthracite  (long 

tons). 

51,000,000 

85,750,000 

Pig  Iron  (long  tons), 

13,800,000 

260,000,000 

Copper  (pounds),     . 

606,000,000 

98,000,000 

Gold  (troy  ounces). 

3,800,000 

79,000,000 

Petroleum  (barrels). 

63,000,000 

75,750,000 

Silver  (tro}'-  ounces). 

74,500,000 

35,750,000 

Natural  Gas, 

23,600,000 

Lead  (short  tons)    . 

271,000 

23,500,000 

Zinc  (short  tons),    . 

124,000 

10,600,000 

In  that  year  the  United  States  led  all  countries  in  the  produc- 
tion of  coal,  iron,  copper,  gold,  silver,  and  lead.  Its  primacy  in 
the  production  of  the  precious  metals  is  closely  contested,  as 


Manufacturing  Industries  39 

regards  gold  by  British  South  Africa  and  AustraHa,  and  as  re- 
gards silver  by  Mexico.  In  all  the  other  products,  however,  its 
ascendency  promises  to  increase  rather  than  to  diminish  with 
the  progress  of  time.  Its  greater  area  should  enable  it  to  pro- 
duce more  of  some  of  these  minerals  than  other  countries,  but 
its  ability  to  produce  more  of  all  of  them  is  a  striking  evidence 
of  the  wealth  of  its  natural  resources. 

821.    The    development   of   manufacturing   in   the    United  Develop- 

.  .,.,,,  ment  of 

States  has  been  part  of  a  general  movement  ni  which  all  pro-  Manufac- 

eressive  countries  have  shared,  consisting  in  the  introduction  tunnj^ 
o  /•  J         Industries 

of  machinery  to  perform  tasks  that  could  not  be  performed  at 

all  or  not  nearly  so  cheaply  by  hand  labour.  The  resulting  "  in- 
dustrial revolution  "  began  to  be  felt  in  America  during  the 
first  decade  of  the  nineteenth  century,  and  has  since  spread 
Until  it  has  afifectcd  industrial  methods  in  the  New  even  more 
than  in  the  Old  World. 

The  mechanical  inventions  of  the  nineteenth  century,  some 
of  which  have  already  been  described,  completed  the  industrial 
revolution  begun  in  the  eighteenth,  by  causing  machinery  to 
take  the  place  of  hand  labour  in  nearly  every  branch  of  indus- 
try. Most  important  were  inventions  connected  with  the  gen- 
eration and  utilisation  of  electrical  power.  The  telegraph,  the 
telephone,  the  dynamo,  the  electric  light,  and  the  electric  car 
are  a  few  of  the  inventions  which  promise  to  make  the 
twentieth  century  the  age  of  electricity  as  the  nineteenth  was 
the  age  of  steam.  Up  to  the  present  time  the  generation  of 
electricity  has  required  steam  or  water  power.  It  has  been, 
therefore,  a  secondary  rather  than  a  primary  motor,  and  im- 
portant because  of  the  ease  with  which  it  can  be  transmitted 
great  distances  and  applied  in  just  the  amount  needed  for  each 
operation.  By  means  of  electricity  sources  of  power,  such  as 
the  Falls  of  Niagara,  which  were  too  great  to  be  applied  directly 
to  the  rotation  of  machinery,  have  been  turned  to  a  variety  of 
uses.  The  power  of  Niagara  now  not  only  propels  the 
machinery  of  numerous  manufacturing  establishments,  but  fur- 
nishes electric  lights  and  force  to  run  electric  cars  to  towns 
within  a  radius  of  twenty  miles.  In  the  West  water  power 
is  now  used  to  generate  electricity  to  aid  in  mining  operations 
at  distances  of  sixty-five  miles  and  upwards. 


40    Industrial  Expansion  of  the  United  States 

The  manufacturing  progress  of  the  United  States  is  roughly 
indicated  by  the  figures  in  the  following  table,  based  on 
the  census  returns : 

Statisiici  of  Manufactures  in  the  United  States,  18^0  to  /goo. 


Number  of  Es 

Total 

Total 

Value  of 

tablishments 

Capital 

(Average) 

Products 

Reporting 

Wage-earners 

1850, 

123,025 

$     533,000,000 

957.000 

$1,019,000,000 

i860, 

140,433 

1,010,000,000 

1,311,000 

1,886,000,000 

1870, 

252,148 

2,118,000,000 

2,054,000 

4,232,000,000 

1880, 

253,852 

2,790,000,000 

2,733,000 

5,370,000,000 

1890, 

355.405 

6,525,000,000 

4,252,000 

9,372,000,000 

1900, 

512,276 

9,831,000,000 

5,315,000 

13,010,000,000 

Manufac- 
tures of 
Iron  and 
Steel 


A  Striking  fact  revealed  by  these  statistics  is  that  while  the 
number  of  establishments  and  of  wage-earners  increased  five- 
fold or  less  during  the  period,  the  value  of  products  increased 
thirteen-fold,  and  the  amount  of  capital  nineteen-fold.  This 
affords  indirect  support  to  the  statement  that  the  country's 
progress  in  manufacturing  has  been  for  the  most  part  progress 
in  machine  production.  A  more  accurate  notion  of  the  growth 
of  manufactures  is  to  be  obtained  bv  studving  the  facts  in  refer- 
ence  to  particular  branches  of  industry. 

The  principal  change  that  has  taken  place  in  the  iron  and 
steel  industry  is  a  substitution  on  a  large  scale  of  steel  for  iron 
products.  Thus  in  1880  less  than  one-third  of  the  3,800,000 
tons  of  pig  iron  produced  in  the  United  States  was  converted 
into  steel;  in  1900  about  four-fifths  of  the  13,790,000  tons  pro- 
duced was  so  converted.  As  late  as  1878  more  iron  than  steel 
rails  were  produced  in  the  country ;  at  present  iron  rails  have 
practically  gone  out  of  use,  as  but  a  few  thousand  tons  con- 
tinue to  be  rolled  each  year  in  comparison  with  two  to  three 
million  tons  of  rails  of  steel.  Another  change  is  in  the  process 
by  which  steel  is  made.  Improvements  in  the  open-hearth 
process  invented  by  Siemens  in  1867  have  caused  it  to  gain  in 
favour  in  comparison  with  the  Bessemer  process.  The  follow- 
ing table  illustrates  this  development : 


Manufactures  of  Cotton  41 


Statislics  of  Crude  Steel  Produced 

in  the  United  States 

(long  tons) 

Open-hearth 

Bessemer  Steel 

Steel 

All  Other 

Total 

JO,             3,690,000 

513,000 

75,000 

4,278,000 

j5,             4,910,000 

1,137,000 

69,000 

6,116,000 

30,             6,680,000 

3,398,000 

105,000 

10,183,000 

The  larger  production  of  open-hearth  steel  is  significant  be- 
cause it  indicates  a  utilisation  of  ores  which  could  not  be  eco- 
nomically treated  by  the  Bessemer  process. 

Comparing  the  growth  of  iron  and  steel  manufacturing  in 
the  United  States  with  its  growth  in  other  countries,  it  appears 
that  Germany  alone  has  experienced  a  similar  development. 
The  latter  country  now  contests  with  Great  Britain  for  the 
position  of  second  largest  iron-producing  country  in  the 
world.  In  1902  the  United  States  produced  more  iron  and 
steel  than  both  of  these  countries  together,  while  either  one  of 
them  produced  four  times  as  much  as  any  other  single  country. 

The  progress  of  the  United  States  in  iron  and  steel  manu-  Manufac- 
facturing  has  contributed  greatly  to  its  progress  in  other  lines  Qq^^^q^^ 
by  cheapening  machinery,  but  in  no  other  has  so  favourable 
a  showing  been  made.  More  typical  of  the  general  manufactur- 
ing development  of  the  country  is  the  growth  of  the  cotton  in- 
dustry, a  department  in  which  the  United  States  is  still  inferior 
to  Great  Britain.  The  average  annual  consumption  of  cotton 
in  the  United  States  in  the  six  years  1873- 1878  was  1,180,000 
bales,  as  compared  with  an  average  world  consumption  of 
5,490,000.  In  the  years  from  1891  to  1896  the  average  annual 
consumption  in  the  United  States  had  increased  to  2,570,000 
bales,  but  the  world  consumption  in  the  same  period  had  in- 
creased to  10,500.000  bales.  The  gain  in  the  consumption 
by  the  United  States  was  thus  from  21  to  24  per  cent,  of 
the  total.  In  the  year  1900  the  United  States  consumed 
29  per  cent,  of  the  world's  total.  The  same  story  is  told 
by  a  reference  to  the  number  of  spindles  in  American  mills 
at  different  periods.  The  census  for  i860  gave  the  total 
at  5,000,000.  By  1880  the  number  had  doubled.  In  1890  it 
was  returned  as  14,000,000  and  in  1900  as  19.000,000.  In 
interpreting  these  figures  it  must  not  be  forgotten  that  there  is 
a  high  protective  tariff  on  cotton  goods  which  prevents  the 


Concentra- 
tion in 
Manufac- 
turing 


The  De- 
velopment 
of  Foreign 
Trade 


42    Industrial  Expansion  of  the  United  States 

foreign  manufacturer  from  competing  on  equal  terms  in  the 
American  market. 

It  would  require  too  much  space  to  des'cribe  in  detail  the 
growth  of  other  branches  of  manufacturing.  In  every  line  in 
which  machinery  can  be  largely  used  the  United  States  has 
made  notable  progress,  with  the  general  result  that  the  country 
now  depends  less  upon  Europe  than  at  any  previous  period  for 
the  manufactured  goods  that  she  requires  and  that  her  own 
manufactured  products  are  coming  to  take  a  very  important 
place  among  her  exports.  With  the  increased  use  of  machin- 
ery in  manufacturing  has  come  a  tendency  towards  con- 
centration of  management  and  resulting  enlargement  of  the 
size  of  the  business  unit.  The  latest  phase  of  this  develop- 
ment is  the  so-called  "  trust."  Competing  firms  have  been 
combined  into  great  corporations,  which  in  some  cases  have 
gained  a  virtual  monopoly,  at  least  for  a  time,  of  the  branches 
of  manufacturing  with  which  they  are  concerned.  The  prob- 
lems which  have  arisen  in  connection  with  this  movement  are 
discussed  in  Chapter  XXV. 

§  22.  The  growth  of  the  foreign  trade  of  the  United  States 
has  been  less  striking  than  the  development  of  home  industries, 
partly  because  of  the  protective  tariff  which  has  restricted  the 
importation  of  protected  articles.  The  following  table  brings 
out  the  main  facts  in  reference  to  the  country's  foreign  trade 
since  1855 : 

Foreign  Cojnnierce  of  the  United  States,  iSjj  to  igoo 

Percentage 


Increase  or 

Imports 

Exports 

Total 

Decrease* 

1855, 

$258,000,000 

$219,000,000 

$477,000,000 

i860, 

354,000,000 

334,000,000 

688,000,000 

+46 

1865, 

239,000,000 

166,000,000 

405,000,000 

-70 

1870, 

436,000,000 

393,000,000 

829,000,000 

-I-105 

1875, 

533,000,000 

513,000,000 

1,046,000,000 

-j-26 

I8S0, 

668,000,000 

836,000,000 

1,504,000,000 

-f44 

1885, 

578,000,000 

742,000,000 

1,320,000,000 

—  12 

1890, 

789,000,000 

858,000,000 

1,647,000,000 

+25 

1895. 

732,000,000 

808,000,000 

1,540,000,000 

—6 

1900, 

850,000,000 

1,394,000,000 

2,244,000,000 

-f46 

Down  to   1874  the  value  of  imports  regularly  exceeded  the 

*  -}-  increase,  —  decrease. 


Changes  in  Exports  43 

value  of  exports,  chiefly  because  during  that  period  foreign 
capital  in  the  form  of  machinery,  etc.,  was  being  imported, 
with  which  to  develop  the  internal  resources  of  the  country. 
The  excess  of  exports  which  has  characterised  the  trade  in 
every  year  except  three  since  1874  indicates  an  increasing  re- 
liance on  home  capital  and  the  partial  repayment  of  the  foreign 
capital  invested  here  during  the  earlier  period.  The  table 
reveals  also  the  violent  fluctuations  to  which  foreign  trade  is 
subject. 

During  the  last  twenty  years  the  character  of  the  country's  Changes 

^  ^    •'  .  -^       in  Exports 

export  trade  has  changed  somewhat,  as  is  shown  by  the  follow- 
ing table : 

Percentages  of  Total  Exports  of  Different  Kinds  of  Products, 


iSSo  to 

igoo 

Agriculture 

Mining 

Forest 

Manufactures 

1880, 

83 

I 

2 

12 

1890, 

74 

3 

3 

18 

1900, 

61 

3 

4 

32 

The  growth  of  export  trade  in  manufactured  products  indi- 
'cated  justifies  the  belief  that  the  United  States  is  passing  the 
period  when  her  manufacturing  industries  as  a  whole  require 
protection.  That  they  are  still  protected  by  high  tariff  duties, 
liowever,  must  not  be  lost  sight  of  in  interpreting  the  facts 
shown,  or  the  other  fact,  of  which  much  has  been  made  in 
recent  discussions,  that  exports  now  exceed  imports  of  manu- 
factured products.  This  would  certainly  not  be  the  case  if  the 
protective  tariff  were  repealed. 

In  comparison  with  European  countries,  and  notably  with 
Great  Britain,  the  foreign  trade  of  the  United  States  is  small 
in  proportion  to  her  population  and  wealth.  The  reason  for 
this  is  that  the  United  States  is  itself  adapted  to  the  produc- 
tion of  such  a  variety  of  products  that  different  sections  secure 
by  means  of  internal  trade  most  of  the  things  which  they  re- 
quire. No  European  country  could  afford  to  dispense  with 
foreign  products,  since  to  do  so  would  entail  suffering  upon 
whole  classes  of  the  population  who  would  thereby  be  deprived 
of  the  very  necessaries  of  life.  It  would  entail  hardship  on  the 
people  of  the  United  States  also  if  foreign  trade  were  inter- 


Summary 


Conclusion 


44    Industrial  Expansion  of  the  United  States 

rupted,  but  the  articles  that  would  be  missed  would  not  be  abso- 
lute necessaries,  but  comforts  such  as  coffee,  sugar,  tea,  and 
tropical  fruits.  The  United  States  is  more  nearly  industrially 
independent  than  any  other  important  country  in  the  world 
unless  it  be  China,  whose  independence  is  due  more  to  the  low 
standards  of  living  of  her  people  than  to  the  abundance  of  her 
natural  resources. 

§  2T,.  In  the  preceding  sections  the  principal  facts  in  regard 
to  the  industrial  expansion  of  the  United  States  have  been 
passed  in  review.  The  circumstances  which  favoured  the  estab- 
lishment of  the  fundamental  legal  institutions,  freedom  of  con- 
tract and  private  property,  were  discussed,  and  their  incon- 
sistency with  the  other  institution,  slavery,  which  was  swept 
away  by  the  Civil  War,  alluded  to.  There  followed  a  descrip- 
tion of  the  physical  characteristics  of  the  Xorth  American 
Continent  and  a  sketch  of  the  progress  of  the  principal 
branches  of  industry,  transportation,  agriculture,  mining, 
manufacturing,  and  foreign  trade,  with  incidental  reference  to 
the  standing  of  the  United  States  among  the  nations  of  the 
world  in  these  different  branches  of  production. 

The  point  most  deserving  of  emphasis  in  this  account  is  the 
debt  which  the  country  has  owed  at  every  stage  of  its  progress 
to  its  natural  resources.  These  have  played  an  important  part 
in  developing  in  the  typical  American  the  restless  energ}', 
enterprise,  and  mechanical  ingenuity  by  which  he  is  distin- 
guished. At  the  same  time  they  have  offered  an  almost  bound- 
less field  for  the  exercise  of  these  qualities  and  have  so  richly 
rewarded  effort  that  the  standard  of  comfort  and  general  well- 
being  in  the  United  States  has  been  higher  than  in  any  other 
country  of  the  world  at  all  comparable  with  it  in  area.  If  the 
United  States  stood  first  among  the  nations  of  the  world  in  the 
year  1900  in  the  production  of  corn,  wheat,  cotton,  coal,  iron, 
silver,  gold,  copper,  and  lead,  it  was  owing  chiefly  to  the  coun- 
try's natural  endowment  of  broad  and  fertile  acres,  favourable 
climate,  and  rich  mineral  resources.  Until  the  present  day  suc- 
cessive generations  of  Americans  have  been  able  to  reap  large 
profits  from  the  exploitation  of  these  natural  resources.  The 
same  process  will  continue  for  many  years  longer,  but  already 
there  are  indications  that  the  richest  treasures  of  nature  in 


Conclusion  45 

virgin  land,  primaeval  forests,  and  mineral  deposits,  have  been 
taken  and  that  the  people  must  accustom  themselves  to  a  slower 
rate  of  progress  and  a  less  generous  response  to  their  labour. 

REFERENCES  FOR   COLLATERAL  READING 

Lodge,  A  Short  History  of  English  Colonies  in  America;  Mc- 
Master,  History  of  the  People  of  the  United  States,  Volumes  I.  and 
II.;  *  IVilson,  Division  and  Reunion;  Rand,  Economic  History 
since  1763;  *Turner,  The  Significance  of  the  Frontier  in  American 
History:  Taussig,  Tariff  History  of  the  United  States;  *Shaler, 
The  United  States  of  America,  2  \o\'s,.;*  Whitney,  The  United 
States;  Wright,  The  Industrial  Evolution  of  the  United  States; 
Tarr,  Economic  Geology  of  the  United  States;  Statistical  Abstracts 
of  the  United  States;  Abstract  of  the  Twelfth  Census,  1900;  *  Co- 
mans,  Industrial  History  of  the  United  States. 


CHAPTER  III 

PRELIMINARY   SURVEY   OF   THE   FIELD    OF   ECONOMICS 

T^e  §  24.  In  the  definition  ''  economics  is  the  social  science  of 

^lotives  to     ,      .         ,,11  ,  •  1  •     •      1         ,  T     1 

Business  business  the  last  word  is  used  in  its  broadest  sense,  it  de- 
Activity  notes  activity  entered  into,  not  primarily  for  its  own  sake,  but 
for  the  sake  of  some  indirect  return.  Business  is  thus,  in  a 
sense,  "  work  "  as  distinguished  from  "  play,"  but  must  not  be 
thought  of  as  necessarily  disagreeable.  It  includes  activity, 
that  is,  pleasurable  mental  or  physical  exercise,  as  well  as  effort, 
that  is,  exercise  which  involves  some  element  of  discomfort  or 
pain.  The  rational  man  tries  to  arrange  his  v/ork  so  that  it  will 
involve  as  little  effort  as  possible. 

The  motives  to  business  activity  are  too  familiar  to  require 
analysis.  Men  are  so  constituted  that  their  happiness,  their 
existence  even,  depends  upon  their  having  command  over  cer- 
,  tain  material  commodities  and  personal  services.  They  must 
have  food,  shelter,  and  clothing  in  order  to  live.  Such  things 
satisfy  their  primary,  physical  wants.  Next  come  the  more 
complex  wants  which  civilisation  has  implanted  in  the  human 
breast.  Men  desire  tools,  machines,  conveniences  for  travel 
and  social  intercourse,  and  the  countless  other  things  which 
contribute  to  the  comfort  of  modern  life.  The  object  of  busi- 
ness activity  is  to  create  or  obtain  these  material  and  imma- 
terial conditions  to  well-being.  Primitive  men  went  about 
the  task  directly.  They  killed  game  for  food,  erected  their  own 
huts,  and  made  their  own  garments  from  the  skins  of  animals. 
Their  civilised  brothers  have  learned  that  business  activity  is 
more  fruitful  when  it  proceeds  by  roundabout  and  co-operative 
methods.  They  spend  much  of  their  time  in  fashioning  tools, 
machines,  and  other  aids  to  production,  and  concentrate  their 
attention  on  special  tasks,  relying  on  others  to  provide  most 
of  the  things  which  they  require.     It  is  this  indirectness  of 

46 


Characteristics  of  Economic  Man         47 

modern  business  activity  which  gives  rise  to  many  of  the  most 
important  problems  of  economics. 

§  25.  In  the  broad  sense  in  which  the  term  "  business  "  is  Character- 
used  in  the  definition  of  economics,  it  is  evident  that  business  'sticsof  the 

'  .  bconoraic 

men  and  women  are  nearly  as  numerous  in  each  community  as  Man 

the  adult  inhabitants.  Even  those  who  live  entirely  on  incomes 
from  property  must  be  included,  since  their  property  plays  a 
role  in  business  even  when  they  themselves  do  not.  Excluded 
are  children  and  old  persons  dependent  upon  others  for  sup- 
port and  the  so-called  "  dependent  "  classes,  whose  maintenance 
is  a  charge  on  the  whole  community.  Among  the  latter  are 
included  not  merely  the  insane,  the  blind,  the  deaf,  criminals, 
paupers,  etc.,  w'ho  are  maintained  in  asylums  and  prisons,  but 
also  beggars,  swindlers,  and  thieves  who  are  still  at  large,  but 
who  support  themselves  not  by  useful  w^ork,  but  by  preying 
upon  the  sympathy  or  the  property  of  others.  In  confining 
his  study  to  the  business  classes,  the  economist  does  not,  of 
course,  ignore  the  existence  of  these  dependents.  He  simply 
leaves  the  special  investigation  of  the  problems  to  which  their 
presence  in  society  gives  rise  to  his  co-\vorker,  the  sociologist. 
A  first  step  in  the  study  of  business  is  a  clear  analysis  of  the 
character  and  motives  of  the  business  man.  Economists  have 
been  accused  of  setting  up  a  purely  imaginary  business  or 
"  economic  "  man,  and  constructing  a  science  to  explain  what 
business  relations  would  prevail '  if  all  men  were  like  the 
creature  of  their  imaginations.  To  avoid  this  criticism  we  will 
begin  with  a  characterisation  of  the  typical  business  man  to  be 
found  to-day  in  the  United  States  and  other  countries  in  the 
same  stage  of  industrial  development.  He  has  four  traits 
which  show  themselves  more  or  less  clearly  in  all  of  his  acts : 

( 1 )  The  business  man  pursues  his  own  interest  in  his  busi-  Self- 
ness  dealings  and  assumes  that  others  will  do  the  same.     This  ^^^^^^^t 
does  not  mean  that  he  is  steeped  in  selfishness,  but  simply  that 

from  his  point  of  view  "  business  is  business,"  not  play  nor 
philanthropy,  and  that  he  prefers  to  keep  his  getting  separate 
and  distinct  from  his  giving. 

(2)  In  judging  of  his  own  interest  the  business  man  thinks  The 

of  himself  not  as  an  isolated  individual,  but  as  a  member  of     ^^S^^    ® 
different  social  groups,  of  which  the  family  is  by  far  the  most 


Love  of 
Independ- 
ence 

Business 
Ethics 


Utility 


48        Survey  of  the  Field  of  Economics 

important.  He  works  not  for  himself  alone,  but  for  his  family, 
his  union,  his  club,  and,  in  times  of  emergency,  his  country. 
In  different  relations  and  at  different  times  he  identifies  his 
interest  with  the  interests  of  these  organisations.  For  his 
family  the  economic  man  will  sacrifice  as  much  or  more  than  he 
will  for  himself  alone. 

(3)  He  desires  to  be  financially  independent.  His  ambition 
is  to  stand  on  his  own  feet,  to  make  his  own  way,  and,  when  he 
accepts  assistance,  to  give  an  adequate  return  for  it. 

(4)  He  is  controlled  in  his  business  dealings  by  the  code  of 
business  morality  that  pertains  to  his  class.  As  there  is  honour 
even  among  thieves,  so  there  are  special  standards  that  are 
accepted  and  lived  up  to  by  different  business  classes.  These 
are  not  usually  as  high  as  the  standards  professed  in  churches, 
but  they  are  much  higher  than  current  criticisms  of  business 
morality  would  lead  one  to  think.  To  be  maintained,  how- 
ever, in  communities  where  class  barriers  are  constantly  giving 
way,  such  standards  have  often  to  be  reinforced  by  legal  enact- 
ments. 

These  four  characteristics  of  the  economic  man  are  readily 
explained  by  a  reference  to  the  evolutionary  process  which  has 
brought  industrial  society  to  its  present  stage  of  development. 
Self-interest  as  a  dominant  motive,  for  example,  is  the  direct 
fruit  of  that  struggle  for  existence  which  is  still  in  progress 
and  which  makes  self-preservation  the  first  law  of  nature  to 
every  organic  species.  In  the  case  of  men,  religious  and  other 
influences  have  tempered  self-seeking  with  consideration  for 
others,  but  since  those  who  succeed  best  in  rising  above  their 
natural  selfishness,  as  did,  for  example,  some  of  the  monks  and 
nuns  of  the  Middle  Ages,  tend  to  dedicate  their  lives  to  the 
service  of  other  people  and  other  people's  children,  rather  than 
to  rearing  children  of  their  own  and  transmitting  to  them  their 
moral  excellencies,  they  count  for  relatively  little  in  the  stern 
evolutionary  process  that  goes  on  through  the  ages. 

§  26.  The  material  commodities  and  personal  services  which 
satisfy  human  wants  are  conveniently  designated  as  goods, 
while  the  capacity  or  quality  in  goods  which  satisfies  wants  is 
called  utility.  As  used  in  economics  these  terms  are  stripped 
of  the  moral  implication  that  attaches  to  them  in  ordinary 


Utility  and  Value  49 

speech.  Thus  anything  that  satisfies  a  want  has  utihty  and  is 
a  good,  whether  it  be  the  whiskey  of  the  trader  or  the  hymn- 
book  of  the  missionary. 

Not  all  goods  figure  in  business  transactions.  Such  things  Free  Goous 
as  sunlight,  air,  and  water  are  usually  free  goods  for  which 
no  one  expects  or  receives  a  return.  They  are  supplied  by 
nature  in  such  abundance  that  there  is  enough  of  them  for  all 
and  to  spare.  In  general  it  may  be  said  that  whenever  the 
spontaneous  supply  of  any  good  exceeds  the  desire  for  it,  units 
of  that  good  will  be  free. 

In  contrast  with  free  goods  is  that  vastly  larger  class  of  Economic 
commodities  whose  supplies  are  limited  in  comparison  with  the  °^  ^ 
desire  for  them  and  which  are  therefore  objects  of  economy. 
These  are  appropriately  named  economic  goods  and  taken 
together  constitute  the  zvealth  to  secure  which  men  engage  in 
business.  The  characteristic  of  economic  goods  is  that  they 
have  value  as  well  as  utility. 

The  term,  value,  is  used  in  two  distinct  although  closely  Value 
related  senses  in  economics,  and  this  has  given  rise  to  a  great 
deal  of  confusion.  It  may  designate  the  importance  zvliich  a 
person  ascribes  to  a  unit  of  a  good  as  a  condition  to  the  satis- 
faction of  his  zvants.  This  is  value  in  the  subjective  sense  and 
may  be  distinguished  as  value  in  use.  In  the  phrases,  "  the 
value  of  a  loaf  of  bread  to  a  starving  man  is  beyond  calcula- 
tion "  and  "  no  one  knows  the  value  of  an  object  until  he  has 
to  do  without  it,"  values  in  use  are  meant.  The  other  sense  of 
the  term  is  that  of  value  in  exchange.  When  a  bushel  of  wheat 
is  said  to  be  twice  as  valuable  as  a  bushel  of  corn,  it  is  the  ex- 
change ratio  between  the  two  that  is  referred  to.  \^alue  in 
exchange  is  thus  the  pozver  of  a  good  to  command  other  goods 
in  exchange  for  itself.  In  future  in  this  work  the  word  value 
by  itself  will  be  used  in  the  sense  of  value  in  exchange. 

The  three  conceptions,  utility,  value  in   use,  and  value  in  Relation 
exchange,  are  analvsed  more  fullv  in  the  chapter  on  Value  and  ^f^J'Y^^" 
Price.     At  this  point  it  will  suffice  to  suggest  very  briefly  the  and  Value 
relation  which  they  bear  to  each  other.     Free  goods  have  no 
value  in  use,  that  is,  single  units  of  such  goods  have  no  impor- 
tance as  conditions  to  the  satisfaction  of  wants.     Thus  a  cubic 
foot  of  air  in  the  room  in  which  the  reader  sits  has  no  value, 


50        Survey  of  the  Field  of  Economics 

although  it  has  utihty,  because  it  would  not  be  missed  if  with- 
drawn. Other  air  would  rush  in  from  adjoining  rooms  and 
from  outdoors  and  the  equilibrium  of  atmospheric  pressure 
would  be  almost  immediately  re-established.  If  the  room  were 
made  air-tight,  however,  and  one  cubic  foot  of  air  after  an- 
other were  withdrawn,  the  situation  would  be  quite  changed. 
Now,  instead  of  being  indifferent,  each  cubic  foot  of  air  would 
be  of  importance ;  and  as  one  cubic  foot  after  another  was  with- 
drawn this  importance  would  steadily  increase.  As  the  air 
became  thinner,  discomfort,  strangulation,  and  finally  death 
would  ensue,  unless  the  process  of  exhaustion  could  be  checked. 
The  reader  would  in  this  case  ascribe  high  value  to  air,  holding 
it  as  precious  when  at  the  last  extremity  as  life  itself.  As  this 
illustration  indicates,  value  in  use  is  variable  and  measures  the 
extent  of  man's  dependence  under  the  given  conditions  of 
supply  upon  a  unit  of  the  good  being  valued. 
Value  in  The  relation  between  value  in  use  and  value  in  exchange  is 

Value  in  somewhat  more  complex.  At  the  outset  it  is  obvious  that  a 
Exchange  good  must  have  value  in  use  to  sonieone  as  a  condition  to  its 
having  value  in  exchange.  Such  value  in  use  may  be  imme- 
diate as  in  the  case  of  goods  finished  and  ready  for  consump- 
tion, or  remote  as  in  the  case  of  raw  materials.  Unless  it  is 
present  there  can  be  no  value  in  exchange  for  the  simple  rea- 
son that  no  one  will  give  anything  for  something  which  no  one 
considers  of  any  importance.  In  the  second  place  a  good 
which  has  value  in  use  to  two  or  more  persons  so  situated  that 
they  may  have  business  dealings  with  each  other  will  normally 
have  value  in  exchange.  This  may  be  inferred  from  the  defini- 
tion of  value  in  use,  since  a  good  which  is  of  importance  to  the 
well-being  of  two  or  more  persons  can  hardly  fail  to  be  worth 
something  in  other  goods.  Since  value  in  exchange  never 
arises  in  the  absence  of  value  in  use,  and,  on  the  other  hand, 
normally  results  when  value  in  use  is  present,  there  must  be  a 
close  causal  connection  between  the  two.  The  explanation  of 
this  connection  must  be  deferred  to  Chapter  V. 
Price  Closely  related  to  value  in  exchange  is  another  familiar  con- 

cept, that  of  price.  As  ordinarily  used  in  business  conversa- 
tion price  designates  exchange  value  measured  in  ter)us  of 
money,  money  being  the  universal  medium  of  exchange.     In 


Production  and  Consumption  51 

the  United  States  prices  are  expressed  in  dollars  and  cents,  and 
the  dollar  is  maintained,  by  means  of  regulations  described  in 
Ciiapter  XVII., as  the  invariable  exchange  equivalent  of  22,-22 
grains  of  pure  gold.  It  follows  that  current  American  prices 
indicate  the  quantities  of  the  commodity  i^old,  for  which  units 
of  the  commodities  priced  would  exchange  on  the  given  date 
in  the  given  market. 

§  27.  The  limitation  on  the  supply  of  goods  which  makes 
them  economic  or  valuable  may  be  due  to  the  fact  that  they 
are  unique,  that  they  are  controlled  by  a  monopoly,  or  simply 
that  business  activity  is  required  to  bring  them  into  existence. 
Examples  of  absolute  limitation  are  afforded  by  old  coins  or 
stamps,  pictures  by  deceased  artists,  etc.  Such  goods  often 
acquire  with  age  a  value  out  of  all  proportion  to  the  esteem  in 
which  they  were  originally  held.  Monopolised  goods  are 
equally  familiar.  Such  are  patented  goods  and  those  produced 
by  means  of  secret  processes.  Most  common  of  all  are  goods 
whose  supplies  are  limited  simply  because  business  activity  is 
needed  to  create  them. 

The  creation  of  economic  goods,  or,  more  accurately,  of  the  Production 

utilities  embodied  in  them,  is  called  production.     It  is  the  chief  ^""^^  ^9"- 
P  ,       .  .    .  ,^  .....  sumption 

purpose  oi  busmess  activity.     Contrasted  with  it  is  consump- 

tio)i,  the  destruction  of  utilities  incidental  to  the  satisfaction  of 
zvants.  The  latter,  as  already  suggested,  furnishes  the  prin- 
cipal motive  for  business  activity.  Consumption  must,  for  the 
sake  of  clearness,  be  sharply  contrasted  with  mere  utilisation, 
as  for  example  of  fuel  or  raw  materials  in  manufacturing.  The 
latter,  although  sometimes  described  by  the  misleading  phrase 
"  productive  consumption,"  is  really  production  itself. 

Every  individual  is  of  necessity  a  consumer  of  economic 
goods.  If  he  is  not  a  producer  as  well,  the  world  is  made 
poorer  because  of  his  existence.  What  he  eats,  drinks,  and 
wears  is  so  much  taken  from  the  limited  stock  upon  which  all 
must  subsist.  Looked  at  from  the  point  of  view  of  the  col- 
lective good,  such  an  individual  is  either  a  recipient  of  charity 
or  a  parasite  or  both.  In  judging  of  a  person's  standing  as  a 
producer,  full  credit  must  be  given  for  the  creation  of  those 
immaterial  goods  upon  which  the  world's  happiness  so  largely 
depends.     Services  as  well  as  commodities  contribute  to  human 


The  State 
of  Normal 
Equilib- 
rium 


Effort    and 
Sacrifice 
Involved  in 
Production 


52         Survey  of  the  Field  of  Economics 

well-being,  and  the  field  of  economic  study  would  be  barren 
indeed  if  they  were  left  out  of  account.  Allowance  must  also 
be  made  for  the  part  which  property,  like  land,  buildings,  etc., 
plays  in  production.  In  the  United  States  the  moral  sense  of 
the  community  approves  on  the  whole  of  the  institution  of  pri- 
vate property  and  hesitates  to  condemn  a  person  who  lives  in 
idleness,  so  long  as  he  confines  his  consumption  to  the  goods 
which  the  income  from  his  property  enables  him  to  purchase. 
It  would  be  inaccurate,  therefore,  in  the  present  stage  of  eco- 
nomic development  to  characterise  such  a  person  as  either  a 
recipient  of  charity  or  a  parasite,  although  the  presence  of 
such  persons  in  society  itself  constitutes  a  strong  argument 
against  the  continuance  of  the  institution  of  private  property 
which  makes  their  existence  possible. 

It  is  important  for  the  student  to  form  a  clear  mental  picture 
of  economic  goods  or  wealth  as  an  aggregate.  To  this  end 
production  may  be  thought  of  as  a  vast  network  of  pipes  all 
conveying  products,  i.  e.,  valuable  commodities  and  services, 
to  a  central  reservoir,  from  which  they  are  distributed  by  means 
of  consumption  pipes  to  the  individuals  who  make  up  society. 
Obviously  if  the  streams  of  goods  entering  through  the  pro- 
duction pipes  are  just  equalled  by  the  streams  of  goods  passing 
out  through  the  consumption  pipes,  society's  wealth  is  neither 
increasing  nor  decreasing.  This  is  the  situation  described  later 
as  that  of  normal  cqnilibriuni.  It  is  full  of  scientific  interest 
because  while  it  continues  economic  forces  just  balance  each 
other  and  opportunity  is  afforded  to  study  the  business  world 
as  it  would  be  if  all  influences  were  permitted  to  work  out 
their  full  effects  free  from  disturbing  changes. 

§28.  Most  goods  are  limited  in  supply  (and  consequently 
valuable)  simply  because  business  activity  is  needed  to  create 
them.  To  the  extent  that  business  entails  effort  it  is  obvious 
why  its  products  must  normally  have  value.  If  they  did  not, 
business  men  would  be  under  no  inducement  to  produce  them. 
But  business  is  often  merely  a  form  of  pleasurable  activity. 
Why,  it  may  be  asked,  are  not  goods  which  it  is  a  pleasure  to 
create,  such  as  the  products  of  talented  artists,  multiplied  until 
they  become  free  like  the  superabundant  gifts  of  nature  ?  Two 
circumstances  prevent  such  a  result. 


The  Cost  of  Production  53 

In  the  first  place  artistic  talent  is  rare  in  comparison  with  the 
demand  for  artistic  products.  Even  if  all  artists  of  first-rate 
ability  were  so  constituted  that  they  could  derive  unalloyed 
pleasure  from  their  work  during  ten  hours  out  of  every  twenty- 
four,  there  would  still  be  a  scarcity  of  artistic  products  which 
would  prevent  them  from  being  free  goods.  But  few  if  any 
artists  are  able  to  work  even  ten  hours  a  day  without  incurring 
a  sacrifice,  and  this  is  the  second  circumstance.  Production 
and  consum])tion  are  mutually  exclusive  and  each  takes  time. 
It  follows  that  the  hours  spent,  no  matter  how  pleasantly,  in 
production,  are  hours  substracted  from  the  consuming  period. 
As  long  as  the  hours  devoted  to  business  activity  afford  more 
pleasure  than  would  the  same  hours  devoted  to  leisurely  con- 
sumption, the  former  involves  no  sacrifice.  But  as  work  is 
continued  through  the  day  it  loses  in  interest,  while  leisurely 
consumption  gains  in  attraction.  In  consequence  after  a  few 
hours'  toil  the  balance  is  usually  turned  and  work,  even  though 
still  pleasurable,  ceases  to  be  more  pleasurable  than  consump- 
tion. In  this  situation  to  continue  to  produce  is  to  make  a 
sacrifice.  As  the  economic  man  declines  to  put  forth  eft'ort  that 
is  not  rewarded  in  valuable  products,  so  he  declines  to  incur 
sacrifice  that  is  not  similarly  recompensed.  This  fact  limits 
the  supplies  of  all  goods  except  those  which  nature  furnishes 
in  superabundance,  and  is  one  of  the  fundamental  causes  of 
value. 

It  might  be  thought  tliat  improvements  in  methods  of  pro- 
duction would  increase  the  number  of  free  goods,  but  experi- 
ence seems  to  show  that  wants  multiply  even  more  rapidly  tb.an 
processes  improve  and  that  the  number  of  free  goods  is  grow- 
ing smaller  rather  than  larger  as  time  goes  on.  Even  water 
and  pure  air,  to  people  who  live  in  cities,  are  now  among  the 
economic  goods  which  command  a  price. 

The  sum  of  the  efforts  and  sacrifices  that  are  involved  in  The  Cost  of 
production  constitute  what  is  known  in  economics  as  the  cost  Production 
of  production.  They  are  the  advances  which  must  be  recom- 
pensed in  the  value  of  the  product,  if  actual  loss  in  well-being 
is  to  be  avoided.  Under  favourable  circumstances  such  cost 
involves  only  sacrifices,  that  is.  the  doing  of  things  that 
are   less   pleasurable  than   other   things   that   might   be  done. 


54         Survey  of  the  Field  of  Economics 

but  free  from  any  element  of  pain.  The  tendency  of  evolu- 
tion appears  to  be  clearly  towards  bringing  all  costs  to  this 
level.  As  the  same  productive  tasks  are  performed  genera- 
tion after  generation  human  organisms  become  adapted  to 
them  so  that  children  do  with  ease  what  their  fathers  could  da 
only  with  difficulty  and  effort.  If  methods  of  production 
were  not  constantly  changing  so  that  muscles  and  nerves  are 
required  to  adapt  themselves  to  ever  new  situations  a  stage 
might  soon  be  reached  in  which  all  production  would  be  pain- 
less. This  is  one  of  the  goals  towards  which  economic  prog- 
ress should  consciously  be  directed. 

To  be  contrasted  with  the  costs  of  production,  w^hich  are 
psychological  or  subjective,  are  the  expenses  of  production, 
that  is,  the  advances  made  for  materials,  labour,  and  all  the 
other  things  which  co-operate  in  bringing  about  productive 
results.  The  latter  are  objective  and  may  be  expressed  as  sums 
of  money  comparable  with  the  prices  received  for  products. 
Work  §  29.  Until  the  last  one  hundred  and  fifty  years  it  was  cus- 

tomary  for  most  families  to  produce  for  themselves  most  of  the 
things  which  they  required.  Under  such  conditions  the  rela- 
tion between  work  and  pay  was  very  simple.  Each  person  got 
all  or  a  portion  of  the  identical  things  which  he  produced  and 
was  made  to  feel  keenly  his  dependence  upon  his  own  exer- 
tions and  upon  favouring  natural  conditions.  The  introduc- 
tion of  machinery  and  the  era  of  specialisation  to  which  it  has 
given  rise  have  changed  this  situation.  At  present  most  fami- 
lies produce  but  little  for  their  own  direct  consumption.  Those 
who  dwell  in  cities  and  towns,  and  even  those  who  dwell  in  the 
country,  produce  for  the  most  part  for  the  market  and  rely 
upon  the  market  for  the  things  which  they  require.  Nor  is 
this  the  only  complication.  The  great  majority  in  modern 
communities  produce  as  hired  workmen  and  have  no  direct 
share  in  what  they  produce  nor  knowledge  of  the  conditions 
under  which  the  product  is  marketed.  They  receive  as  their 
compensation  wages  or  salaries  agreed  upon  beforehand  and 
shift  to  their  employers  responsibility  for  the  success  of  the 
productive  process  in  which  they  are  engaged.  Under  these 
conditions  the  problem  of  work  and  pay  has  become  one  of 
the  most  difficult  in  the  whole  field  of  economics. 


Wan^es  55 

Foremost  amonj^:  the  world's  workers  are  the  so-called  cap-  The 

tains    of    i)idiistrx    or    entrepreneurs*    who    direct    industrial  },."  ,    '^ 
'  -  '.  \\  orkers 

processes.  Their  remuneration  comes  to  them  as  profits  or 
balances  left  over  from  the  sale  of  products  after  all  of  the 
expenses  of  production  have  been  paid.  Below  them  are  the 
lieutenants  of  industry,  the  salaried  managers  and  bosses,  and 
at  the  bottom  the  rank  and  file  of  the  industrial  army  which  is 
paid  its  remuneration  in  the  form  of  monthly,  weekly,  or  daily 
wages.  A  complete  explanation  of  wages  involves  a  study  of 
the  causes  that  determine  the  prices  of  the  products  of  industry 
out  of  which  money  wages  ultimately  come,  of  the  circum- 
stances which  determine  labour's  share  of  these  prices,  and 
finally  of  the  terms  on  which  money  wages  are  exchanged 
for  the  goods  which  labourers  consume,  since  the  latter  consti- 
tute the  real  zvages  of  labour.  Each  one  of  these  subjects  of 
inquiry  represents  an  obstacle  which  under  present  conditions 
intrudes  itself  between  the  product  of  labour  and  the  pay  of 
labour  and  causes  wage-earners  to  feel  themselves  dependent 
for  their  remuneration  upon  the  good-will  of  employers  even 
more  than  upon  the  quantity  and  quality  of  their  work  or  the 
favourableness  of  natural  conditions. 

Under  the  manorial  system  the  most  important  influence  fix-  Wages 
ing  the  pay  of  villeins  was,  as  has  been  shown,  the  custom 
which  determined  how  large  an  allotment  of  land  the  villein 
should  receive  and  what  services  he  should  render  in  ex- 
change for  it.  In  the  age  of  Elizabeth  custom  was  supple- 
mented by  law  and  judicial  regulation  in  the  determination  of 
this  important  matter.  Not  only  were  laws  passed  fixing  the 
rate  of  pay  for  particular  kinds  of  work,  but  the  general  rule 
was  established  that  the  justices  of  the  peace  should  have  power 
to  regulate  wages.  Neither  custom  nor  law  now  plays  much 
part  in  the  fixing  of  wages.  Their  determination  is  left  to  free 
bargaining  in  all  Western  countries,  and  it  is  diflficult  for  most 
people  to  even  entertain  the  idea  of  a  different  system.  Of  no 
country  is  this  more  true  than  of  the  United  States.  Ameri- 
can courts  have  over  and  over  again  declared  that  the  rights 

*  The  En_c:lish  equivalent  of  this  word,  "undertakers,"  is  occa- 
sionally employed  in  the  above  sense,  but  is  open  to  obvious  ob- 
jections. 


Property 
and  Its 
Earnings 


The 

Methods  of 
Economics 


56         Survey  of  the  Field  of  Economics 

to  liberty  and  to  property  guaranteed  in  all  of  the  State  con- 
stitutions embrace  the  right  of  employer  and  employee  freely 
to  contract  or  bargain,  and  that  laws  attempting  to  abro- 
gate freedom  of  contract  and  to  put  in  its  place  custom 
or  legal  regulation  as  the  determinants  of  wages  are  unconsti- 
tutional. As  is  pointed  out  in  the  chapter  on  the  Legal  Regu- 
lation of  Labour,  there  is  reason  to  think  that  judges  have  gone 
too  far,  at  times,  in  their  application  of  this  principle,  but  its 
fundamental  importance  to  the  present  industrial  organisation 
is  beyond  question. 

§  30.  Next  to  the  right  freely  to  contract,  the  right  to  prop- 
erty is  the  one  most  jealously  guarded  by  modern  governments. 
The  significant  aspect  of  the  right  to  property  in  this  connec- 
tion is  the  right  to  use  it  as  a  means  of  securing  income.  Eng- 
lish and  American  law  distinguishes  between  real  and  personal 
property.  Economics,  in  rough  conformity  to  this  classifica- 
tion, distinguishes  between  land  and  other  gifts  of  nature,  and 
capital  goods,  that  is,  products  of  past  industry  used  in  the 
present  as  aids  to  further  production.  Both  forms  of  property 
afford  incomes  to  their  possessors,  that  from  land  being  known 
in  economics  as  rent  and  that  from  capital  goods  as  interest. 

The  problem  of  property  and  its  earnings  is  quite  as  com- 
plicated as  that  of  work  and  pay.  Li  it  are  involved  not  merely 
economic,  but  moral  relations  of  the  profoundest  significance. 
The  economist  must  not  merely  explain  the  reasons  for  the 
earnings  assigned  to  property  and  the  circumstances  that  deter- 
mine their  amount,  but  he  must  also  supply  the  basis  for  a  wise 
decision  as  to  the  social  utility  of  the  system  which  permits 
these  earnings  to  go  to  individual  property  owners.  It  is  cus- 
tomary in  treatises  on  economics  to  group  together  all  of  the 
problems  connected  with  work  and  pay  and  property  and  its 
earnings  into  one  great  department  of  the  study  known  as 
Distribution.  This  has  to  do  with  the  causes  which  determine 
the  division  of  economic  goods  between  the  individuals  in  in- 
dustrial society.  It  is  the  concluding  stage  in  the  process  of 
production,  and  a  necessary  preliminary  to  consumption. 

§  31.  The  methods  of  economics  are  the  same  as  those  of 
other  sciences,  but  the  complexity  of  the  phenomena  treated 
makes  great  caution  as  to  the  use  of  these  methods  necessary. 


The  Methods  of  Economics  57 

The  method  upon  which  most  rehance  was  placed  by  the  older  Deduction 
English  economists  was  the  deductive,  or  a  priori.  It  consists, 
as  treatises  on  logic  explain,  in  reasoning  from  general  propo- 
sitions to  their  particular  applications.  In  economics  many  of 
the  most  important  of  the  general  propositions  or  premises 
used  are  borrowed  from  other  sciences  {e.  g.,  psychology,  law), 
and  this  makes  some  knowledge  of  these  subjects  an  indispen- 
sable part  of  the  mental  equipment  of  the  economist.  When 
a  premise  is  only  roughly  accurate,  as  is  for  example  the 
assumption  that  wages  are  determined  in  the  United  States  by 
free  and  equal  bargaining  between  employers  and  employees  in 
which  each  pursues  his  own  interest  with  the  same  persistency 
and  the  same  knowledge  of  the  situation  as  the  other,  it  goes 
without  saying  that  conclusions  will  be  only  roughly  accurate 
also,  and  will  need  to  be  tested  if  not  corrected  by  experience. 
Since  rough  accuracy  is  all  that  can  be  claimed  for  most  of  the 
assumptions  used  in  economics,  the  student  must  be  particu- 
larly careful  to  weigh  the  conclusions  reached  at  each  stage  of 
a  long  deductive  argument,  before  he  attempts  to  give  them 
practical  application. 

The  inductive,  or  a  posteriori,  method  is  just  the  reverse  of  Induction 
the  deductive,  since  it  consists  in  summing  up  a  number  of  par- 
ticular propositions  in  a  general  conclusion.  By  means  of  in- 
duction the  detailed  observations  of  like  phenomena,  which 
result  from  the  field  work  of  science,  are  grouped  together  in 
general  statements.  The  latter  then  serve  as  the  premises  for 
deduction,  which  carries  the  conclusion  beyond  the  range  of 
direct  observation.  To  be  sure  of  the  accuracy  of  the  result 
the  scientist  must  appeal  to  observation  again  as  a  means  of 
verification.  The  progress  of  science  thus  begins  and  ends 
with  observation. 

Where  the  phenomena  to  be  observed  are  as  numerous  as  statistics 
they  are  in  economics,  induction  may  take  the  form  of  statistics. 
Individual  instances  of  the  same  phenomenon  are  counted  and 
the  result  given  in  numerical  form.  Bv  means  of  statistics  a 
quantitative  value  is  given  to  the  conclusions  of  induction 
which  justifies  greater  confidence  in  them.  The  statistical 
method  is  applicable  as  yet  to  only  the  simpler  problems  of  the 
science,  but  such  progress  has  recently  been  made  in  the  col- 


58         Survey  of  the  Field  of  Economics 

lection  and  tabulation  of  statistics  that  there  is  every  reason  to 
anticipate  results  of  steadily  increasing  importance  from  its  use 
in  future  years. 
The  §  32.     Much  confusion  exists  in  regard  to  the  nature  of  the 

Economics  I'^^^'S  oi  economics.  Some  writers  declaim  against  govern- 
mental policies  which  they  do  not  like  on  the  ground  that  they 
are  violations  of  economic  law.  Others  are  equally  vociferous 
in  affirming  that  economic  law  cannot  be  changed  by  any  act 
of  the  legislature.  Neither  statement,  as  it  is  ordinarily  under- 
stood, is  true  of  economic  law  in  the  scientific  sense. 

A  scientific  law  is  a  statement  of  the  relation  that  is  believed 
to  obtain  between  phenomena.  This  relation  may  be  one  of 
coexistence  or  of  sequence.  To  illustrate,  it  is  a  law  of  eco- 
nomics that  the  prices  at  which  identical  units  of  any  good  are 
sold  in  markets  between  which  such  units  may  pass  freely  with- 
out any  deterioration  in  quality  or  loss  in  quantity,  will  not  for 
any  length  of  time  differ  by  more  than  the  expense  of  carriage 
between  such  markets.  This  is  a  law  of  coexistence  which  is 
proved  by  deductive  and  confirmed  by  inductive  reasoning. 
Again,  it  is  a  law  of  economics  that  an  increase  in  the  supply 
of  the  units  of  any  good  offered  for  sale  in  any  market  tends 
to  lower  the  price  that  can  be  secured  for  it.  This  is  a  law  of 
sequence.  In  both  cases,  it  should  be  noted,  there  is  implied 
or  expressed  the  absence  of  disturbing  factors.  Free  com- 
munication between  the  markets  must  be  maintained  or  the 
first  law  ceases  to  hold  good.  The  second  law  describes  a 
tendency.  The  increased  supply  may  not  actually  cause  a  fall 
in  price  because  it  may  be  offset  or  more  than  offset  by  an  in- 
crease in  demand.  In  the  statement  of  all  economic  laws  it  is 
taken  for  granted  that  other  things  remain  the  same  so  that 
the  influences  upon  which  the  operation  of  the  law  de- 
pends will  have  an  opportunnity  to  work  out  their  normal 
effects. 

To  be  contrasted  with  law  in  the  scientific  sense,  are  law  in 
the  moral  and  law  in  the  juristic  sense.  Moral  law  states  not 
what  is  but  what  ought  to  be.  It  is  in  this  sense  often  that  the 
term  economic  law  is  used  when  particular  policies  are  said  to 
violate  it.  It  needs  no  argument  to  prove  that  such  a  use  of 
the  term  has  no  place  in  a  scientific  treatise.     Law   in  the 


The  Laws  of  Economics  59 

juristic  sense  has  already  been  defined  and  is  not  likely  to 
cause  confusion. 

The  statement  that  economic  law  cannot  be  changed  by  legis-  The  Xeces- 
lation  is  literally  true.     It  is  equally  true,  however,  that  eco-  Recasting 
nomic  conditions  may  be  changed  by  legislation  and  that  this  Economic 
may  render  entirely  inapplicable  economic  laws  that  were  pre- 
viously significant.     The  development  of  the  legal  system  of 
each  industrial  society  makes  necessary  a  continuous  recast- 
ing of  the  laws  of  economics  if  that  science  is  to  remain  in  vital 
relation  with  actual  business  conditions.    Old  premises  must  be 
discarded  and  new  premises  in  harmony  with  the  new  situa- 
tion must  be  formulated.     For  this  reason  the  implication  of 
the  statement  "  economic  law  cannot  be  changed  by  legisla- 
tion," that  is,  that  legislation  cannot  give  a  new  direction  to 
economic  forces  and  in  that  way  modify  old  relations  between 
economic  phenomena,  is  quite  misleading. 

§  23-  In  the  following  chapters  the  dififerent  divisions  of  eco-  Outline 
nomics  are  treated  in  the  order  suggested  in  the  preceding  ^ook 
survey.  The  subject  of  consumption  is  first  discussed  as  an 
introduction  to  a  fuller  treatment  of  value  and  price.  Then 
follow  chapters  on  production  and  distribution,  in  which  the 
leading  principles  of  the  subject  are  explained.  The  work 
concludes  with  chapters  on  money  and  on  problems  of  the  day 
falling  within  the  scope  of  economics.  In  the  closing  chapter, 
on  Economic  Progress,  suggestions  scattered  through  the  book 
are  brought  together  with  a  view  to  showing  the  direction  in 
which  industrial  society  is  believed  to  be  moving. 

As  a  conclusion  to  this  preliminary  survey  a  word  of  caution  Conclusiot, 
may  not  be  out  of  place.  Economics  is  an  intensely  human 
study.  Dealing  as  it  does  with  relations  upon  which  the  well- 
being  of  individuals  and  even  of  whole  social  classes  depends, 
it  makes  constant  appeals  to  the  sympathies.  This  fact  serves 
to  make  it  interesting,  but  it  has  the  disadvantage  of  appealing 
to  the  emotions,  when  emotion  can  only  serve  to  bias  .the  judg- 
ment, as  well  as  when  it  may  help  to  right  wrongs  and  to  pro- 
mote progress.  In  studying  the  principles  of  economics,  pas- 
sion, except  the  passion  for  trutii,  is  out  of  place.  What  is 
needed  is  the  same  calm  judgment  that  has  done  so  much  to 
advance  the  natural  sciences.     The  student  should  constantly 


6o         Survey  of  the  Field  of  Economics 

have  in  mind  the  thought  that  his  primary  task  is  to  explain 
existing  business  relations.  He  must  understand  how  they 
came  to  be,  and  the  forces  that  perpetuate  them.  He  must  de- 
tect the  laws  which  govern  them  and  try  to  see  them  in  their 
proper  perspective  as  features  in  a  great  evolutionary  process. 
Only  when  he  has  fulfilled  this  purely  scientific  part  of  his 
task  is  he  equipped  to  take  up  the  discussion  of  practical  prob- 
lems and  to  throw  his  weight  on  this  side  or  that  in  accord- 
ance with  the  dictates  of  his  trained  judgment.  If  he  takes  his 
task  seriously  he  is  very  apt  to  discover  that,  as  he  comes  to 
understand  the  interaction  of  economic  forces  better,  he  is  less 
confident  in  his  demands  for  changes  and  less  sanguine  of  his 
ability  to  accomplish  even  those  modifications  in  law  or  prac- 
tice which  he  still  believes  to  be  desirable.  He  need  not 
fear,  however,  that  the  results  of  his  study  will  be  purely 
negative  or  that  the  subject  will  lose  its  fascination  as  he  pene- 
trates more  deeply  into  it.  It  will  remain  to  the  end  intensely 
human,  and  for  every  radical  change  that  is  discountenanced  by 
better  knowledge,  a  hundred  minor  changes  will  suggest  them- 
selves, manv  of  which  he  mav  himself  live  to  see  fulfilled.  In 
place  of  the  feeling  that  the  world  is  hopelessly  awry,  which 
so  often  oppresses  high-minded  people  when  they  observe  the 
injustices  and  inequalities  to  which  the  poor  are  daily  subjected 
and  the  false  and  vulgar  standards  that  are  too  frequently  char- 
acteristic of  the  rich,  the  conviction  is  likely  to  grow  in  his  mind 
that  an  evolutionary  process  is  going  on  which  has  for  one  of 
its  results  a  gradual  improvement  in  the  conditions  under  which 
the  mass  of  men  live  and  work.  This  conviction  should  not 
and  will  not  lessen  in  the  least  his  desire  to  contribute  his  share 
towards  a  more  rapid  progress,  but  it  will  help  to  reconcile  him 
to  conditions  which  are  only  tolerable  because  they  are 
temporary. 

REFERENCES  FOR   COLLATERAL   READING 

^Marshall,  Principles  of  Economics.  Books  I.  and  II.;  *C"/rtT/t',  The 
Philosophy  of  Wealth,  Chap.  I.;  Walker,  Political  Economy,  Part 
I.;  Ely,  Outlines  of  Economics,  Chap.  X.,  Book  I.;  Chap.  I.,  Part 
I.,  Book  II.;  *Gzde,  Political  Economy,  Book  I.;  Keynes,  The 
Scope  and  Method  of  Economics;  Palgraz/e,  Dictionary  of  Political 
Economy,  articles  entitled  "  Economic  Science,"  "  Method  of 
Political  Economy,"  etc, ;  *Fetter,  Principles  of  Economics. 


Bibliographical  Note  6i 

BIBLIOGRAPHICAL   NOTE 

Because  of  the  diversity  of  views  which  it  presents,  the  liter- 
ature of  economics  is  likely  to  prove  confusing  to  one  who  takes  up 
the  study  for  the  first  time.  In  order  to  see  the  relation  between 
different  writers  and  different  schools,  the  beginner  will  do  well, 
before  he  ventures  far  into  the  subject,  to  read  a  brief  history  of 
economic  theory. 

Ingram's  History  of  Poliiical  Economy  and  Price's  Political  Econ- 
omy in  England  may  be  recommended  for  this  purpose.  Cannan's 
History  of  Theories  of  Production  attd  Distribution  may  then  be  read 
in  connection  with  the  works  which  it  discusses.  It  will  be  found 
helpful  to  learn  something  about  each  author  before  reading  what  he 
has  to  say  on  any  particular  topic,  and  to  this  end  dictionaries  of 
political  economy  should  be  used.  The  standard  English  work  is 
Palgrave's  Dictionary  of  Political  Economy,  in  three  volumes. 
Readers  of  German  should  consult  also  Conrad's  admirable  Handwor- 
terbuch  der  Siaaiswissenschaften,  in  seven  volumes,  while  readers  of 
French  will  find  Say's  Dictionnaire  d'^conomie  Politique,  in  two 
volumes,  helpful. 

The  principal  writers  who  have  contributed  to  the  literature  of  eco- 
nomics available  in  English  may  conveniently  be  distinguished  into 
four  groups: 

I.  "  The  English  classical  school  "  is  the  term  applied  to  Adam 
Smith  {T/ie  Wealth  of  Natio7is),  Malthus  {Essay  on  Population), 
Ricardo  {Principles  of  Political  Ecofiomy  atid  Taxation),  and  John 
Stuart  Mill  {Principles  of  Political  Economy^,  and  their  followers. 
Rae's  Life  of  Adam  Smith,  Bonar's  Malthus  afid  His  Work,  and  J.  S. 
Mill's  Autobiography  may  be  read  with  profit  in  connection  with  the 
works  of  these  authors. 

II.  A  reaction  against  the  doctrines  and  method  of  the  classical 
school  began  about  the  middle  of  the  last  centurj',  and  to  it  the  term 
"historical  school "  is  usually  applied.  The  chief  representatives  of  this 
school  in  Great  Britain  we^-e  Cliffe  Leslie  {Land  Systems  and  Indus- 
trial Economy  of  Ireland,  England,  and  Continental  Countries; 
Essays  in  Political  and  Moral  Philosophy)  and  Toynbee  {The  Indus- 
trial Revolution).  The  school  has  had  its  greatest  development  in 
Germany,  where  it  is  now  represented  by  Gustav  SchmoUer  ( The 
Mercantile  System)-  at  the  University  of  Berlin,  Karl  Biicher  {In- 
dustrial Evolution)  at  the  University  of  Leipsic,  and  other  dis- 
tinguished economists. 

III.  A  reaction  against  the  classical  school  in  quite  a  different 
direction  is  usually  spoken  of  as  the  "  Austrian  school  "  because  of 
the  large  part  which  the  Austrian  economists  Carl  Menger.  Bohm- 
Bawerk,  and  Wieser  have  played  in  its  progress.  In  Great  Britain  it 
has  been  represented  by  Jevons  ( Theory  of  Political  Economy;  Money 
and  the  Mechanism  of  Exchange)  and  Smart  {Introduction  to  the 
Theory  of  Value;  Distribution  of  Income).  The  important  works  of 
Bohm-Bawerk  {Capital  and  Interest;  The  Positive  Theory  of  Cap- 


62  Survey  of  the  Jr^ield  of  Economics 

ital)   and  of  Wieser  {Natural  Value)  have  also   been  translated  into 
English,  by  Professor  Smart  and  one  of  his  pupils. 

IV.  Few  contemporary  British  or  American  writers  would  care  to 
be  classed  rigidly  with  either  of  the  three  schools  referred  to.  For 
that  reason  it  seems  best  to  treat  them  as  a  separate  group.  Prom- 
inent among  English  economists  are  Marshall  {Prmciples  of  Eco- 
nomics; Economics  of  Industry),  Edgeworth  (articles  on  The  Measure- 
ment of  the  Value  of  Money  and  other  topics  in  the  British  Economic 
fournal),  Nicholson  {Principles  of  Political  Economy,  3  vols. ;  Money 
and  Monetary  Problems),  Cannan  {Theories  of  Production  and  Dis- 
tribution), Bonar  {Philosophy  and  Political  Economy;  Malthus  and 
His  Work),  Rae  {Life  of  Adam  Smith;  Co7itemporary  Socialism; 
Eight  Hours  for  Work),  Bastable  {Public  Finance;  The  Theory 
of  International  Trade),  and  Hobson  {The  Evolution  of  Modern 
Capitalism). 

Among  American  economists  should  be  mentioned  the  late  General 
Walker  {Political  Economy;  The  Wages  Question;  Money;  Inter- 
national Bimetallism)  and  the  late  Professor  Dunbar  ( Theory  and 
History  of  Banking).  Prominent  among  contemporary  writers  are 
Sumner  {History  of  American  Currency;  Lectures  on  the  History  of 
Protectionism  in  the  United  States),  Clark  {The  Philosophy  of 
Wealth;  The  Distribution  of  Wealth),  Patten  {Co?isumption;  The 
Theory  of  Dynajnic  Economics;  The  Theory  of  Prosperity),  Adams 
{Relation  of  the  State  to  Industrial  Action;  Public  Debts;  The  Science 
of  Finance),  Hadley  {Railroad  Transportation;  Economics),  Ely  {Prob- 
lems of  To-day  ;  Oittlines  of  Econofnics;  Monopolies  and  Trusts),  Selig- 
man  {Essays  in  Taxation;  The  Incidence  of  Taxation;  The  Economic 
Interpretation  of  History),  Taussig  {Tariff  History  of  the  United 
States;   Wages  and  Capital),  and  Jenks  {The  Trttst  Problem). 

Although  by  no  means  exhaustive  the  above  list  of  authors  and 
titles  will  serve  to  give  some  idea  of  the  scope  of  the  general  liter- 
ature of  economics.  It  may  be  supplemented  by  the  excellent 
bibliographies  contained  in  the  following  works:  Bowker  and  lies, 
The  Reader's  Guide  in  Ecotiomic ,  Social,  and  Political  Science;  Cossa, 
Introduction  to  the  Study  of  Political  Economy;  ^xAXook., Introduction  to 
the  Study  of  Ecofiomics ;  Dewey,  Financial  History  of  the  United  States. 

Much  of  the  contemporary  literature  of  economics  must  be  sought 
in  the  monographic  series  published  by  the  American  Economic 
Association  and  by  the  leading  universities.  The  principal  peri- 
odicals devoted  in  whole  or  in  part  to  economics  are:  The  (Quarterly 
fournal  of  Economics  (Harvard  University,  1886-1903,  17  vols.); 
Political  Science  Quarterly  (Columbia  University, '1886-1903,  18  vols.); 
Annals  of  the  American  Academy  of  Political  and  Social  Science 
(Philadelphia,  1890-1903,  21  vols.);  The  Yale  Review  (Yale  University, 
1892-1903,  II  vols.);  The  fournal  of  Political  Economy  (Chicago 
University,  1892-1903,  11  vols.);  The  British  Economic  fournal  (Qvxiish. 
Economic  Association,  London,  1891-1903,  13  vols.);  The  Economic 
Review  (London,   1891-1903,  13  vols.). 


CHAPTER    IV 
THE   CONSUMPTION   OF   WEALTH 

§  34.  Consumption,  as   has  already  been   suggested,   is  the  Character 
part  of  economics  which  treats  of  the  relations  between  wants  Human 
and  the  means  to  their  satisfaction,  goods.     The  characteristics  "^^'^nts 
of  wants  first  demand  attention. 

It  is  a  famihar  fact  of  human  experience  that  wants  are  in- 
definitely numerous.  Every  day,  in  the  consciousness  of  every 
normal  person,  many  wants  are  felt  which  must  perforce  go 
unsatisfied.  At  times  one  may  delude  one's  self  with  the  belief 
that  if  only  some  pet  desire  were  gratified  perfect  content  would 
follov/,  but  over  and  over  again  the  discovery  is  made  that 
when  the  wished-for  gratification  comes,  other  desires  have 
arisen  in  its  place  and  satisfaction  is  as  far  off  as  ever.  The 
normal  man  is  thus  a  being  whose  wants  constantly  run  ahead 
of  his  ability  to  satisfy  them.  Upon  this  simple  fact  is  based 
the  law  that  the  consuming  power  of  a  community  is  indefi- 
nitely great. 

A  second  familiar  characteristic  of  wants  is  that  they  are  of 
very  different  degrees  of  intensity.  This  is  realised  as  soon  as 
one  tries  to  arrange  all  of  the  wants  of  which  he  is  conscious 
in  a  scale  according  to  their  importance.  Such  an  endeavour 
reveals  also  the  difficulty  of  measuring  wants  and  the  com- 
plexity of  those  which  direct  daily  life.  Corresponding  to 
every  want  that  comes  within  the  scope  of  economics,  is  a 
utility  or  combination  of  utilities  capable  of  satisfying  it.  The 
intensities  of  wants  determine  degrees  of  utility  and  thus,  as  is 
shown  later,  have  great  influence  in  fixing  the  values  of  the 
economic  goods  in  which  utilities  are  embodied. 

§  35.  Variable  as  they  are  in  intensity,  all  wants  are  subject  Law  of  Di 
to  a  law  of  gradual  diminution  and  final  satiety  as  consump-  y["j^-t^""^ 
tion  is  continued.     This  may  be  illustrated  by  reference  to  food. 
A   healthy   American    boy,    given   a   breakfast   of   unlimited 

63 


64 


The  Consumption  of  Wealth 


Present  vs. 

Future 

Goods 


buckwheat  cakes,  attacks  the  first  plateful  with  great  avid- 
ity. His  eagerness  is  reduced  by  each  additional  plateful, 
until  his  hunger  is  satisfied  and  he  must  reluctantly  confess 
that  he  has  had  enough.  As  an  individual's  capacity  to 
enjoy  food  is  limited,  so  is  his  capacity  to  enjoy  clothes.  A 
normal  person  feels  intensely  the  need  of  one  respectable 
suit  of  clothes,  pair  of  shoes,  etc.  A  second  suit  is  less 
indispensable,  but  satisfies  a  lively  desire.  Additional  suits 
satisfy  wants  of  steadily  diminishing  intensities,  and 
in  time  the  point  of  satiety  is  reached  even  by  the  most 
fastidious  dandy.  Less  material  wants  obey  the  same  law. 
Eyes  tire  of  beautiful  pictures  or  beautiful  scenes.  Ears  are 
deadened  in  time  by  even  the  sweetest  music.  In  short, 
each  receptive  faculty  is  subject  to  exhaustion  and  re- 
quires time  to  recuperate.  Upon  this  psychological  principle 
is  based  an  economic  law  of  considerable  importance,  that  of 
diminishing  utility.  We  may  formulate  it  as  follows :  The 
'Atilities  of  additional  units  of  any  good  to  any  consumer 
diminish  normally  as  his  supply  of  iinits  of  that  good  increases. 
This  law  assumes,  of  course,  that  no  change  takes  place  in  the 
character  of  the  consumer  as  his  supply  is  being  increased. 

§  36.  The  normal  man  lives  in  the  present  and  will  make 
greater  sacrifices  to  insure  the  satisfaction  of  present  than  of 
future  wants.  Though  very  general,  this  characteristic  of 
wants  is  more  marked  for  some  social  classes  than  for  others. 
It  would  not  be  far  from  the  truth  to  say  that  young  children 
and  savages  live  entirely  in  the  present ;  that  the  manual  labour- 
ing classes,  especially  in  climates  where  the  winters  are  mild, 
look  only  a  few  months  or  a  few  years  ahead  in  their  economic 
calculations ;  that  the  great  middle  class  of  artisans  and  mer- 
chants plan  with  reference  to  their  own  lives  and  the  lives  of 
their  children ;  and  that  the  founders  of  great  family  fortunes 
include  generations  yet  unborn  in  their  view'.  The  lack  of 
providence  of  the  coloured  family,  which,  when  told  on  Monday 
morning  that  it  would  be  turned  out  if  the  rent  were  not  paid 
by  the  following  Saturday,  agreed  that  then  "  they  needn't  be- 
gin to  worry  until  Friday,"  is  well-nigh  incredible  to  sober  and 
industrious  workingmen  of  the  white  race.  But  equallv  unin- 
telligible to  careful  and  thrifty  members  of  the  class  next  higher 


Present  vs.  Future  Goods  65 

in  the  economic  scale,  is  the  readiness  with  which  these  same 
workingmen  enter  upon  the  responsibihties  of  married  hfe 
without  property  or  guarantee  of  continuous  employment.  It 
is  in  these  psychological  differences  that  economists  discover  a 
chief  reason  for  the  persistence  of  the  inequalities  of  fortune, 
which  are  a  principal  cause  of  dissatisfaction  with  the  present 
industrial  system. 

This  fourth  characteristic  of  wants  is  the  basis  of  a  second 
law  in  regard  to  utility  which  has  reference  to  the  time  of  con- 
sumption rather  than  to  the  quantity  to  be  consumed.  If  goods 
available  for  present  consumption  are  called  present  goods,  and 
those  to  be  available  in  the  future — which  may  exist  in  the 
present  as  unfinished  materials — future  goods,  the  law  may  be 
formulated  as  follows:  The  utility  of  future  goods  is  less  to  the 
normal  consumer  than  the  utility  of  present  goods  of  like  kind 
and  quality  by  an  amount  varying  directly  with  the  degree  of 
futurity."^ 

§  37.  A  fifth  and  last  important  characteristic  of  wants  is  Wants  De* 
that  most  of  them  are  determined  by  social  standards  of  taste  ^y  Social 
rather  than  by  the  independent  judgments  of  the  individual  Standards 
consumers.     This  is  conspicuously  true  of  wants  for  clothing, 
shelter,   and    forms   of  amusement.     That   men — not   to    say 
women — dress  with  reference  to  the  opinions  of  their  neigh- 
bours, changing  the  style  of  their  shoes,  their  clothes,  and  even 
their  collars  and  neckties,  to  conform  to  the  vagaries  of  fashion, 
is  a  fact  of  familiar  observation.     There  is  a  little  more  inde- 
pendence in  the  selection  of  dwelling  houses,  but  here  too  the 
taste  of  the  many  is  subservient  to  that  of  the  few  who  form 
independent  judgments.  As  regards  amusements  it  is  notorious 
that  one  fad  follows  another,  bicycle  riding  giving  place  to  golf 
and  the  latter  to  automobiling. 

This  tendency  of  whole  groups  of  people  to  want  the  same 
thing  at  the  same  time  has  its  good  and  its  bad  economic  side. 
Its  advantage  is  that  it  permits  large-scale  production,  which 
means  usually  production  at  less  cost  in  human  effort  than  pro- 
duction on  a  small  scale.  As  an  oft'set  to  this,  great  waste  re- 
sults from  constant  changes  in  fashion,  not  only  because  goods 
are  produced  which  no  one  will  buy,  but  because  the  machinery, 
tools,  and  factories  designed  for  their  production  must  be 
*  For  further  discussion  of  this  law  see  §166,  p.  29b. 


66  The  Consumption  of  Wealth 

thrown  away  or  adapted  to  new  uses.  Moreover,  deference  to 
social  standards  encourages  a  deadening  uniformity  in  habits 
of  consumption  which  is  inimical  to  progress.  This  bad  side 
is  seen  conspicuously  in  connection  with  architecture  in  the 
United  States.  Succeeding  the  colonial  style  of  building  came 
a  series  of  styles  each  one  worse  than  its  predecessor.  Slavish 
imitation  of  these  bad  styles  has  cvunbered  the  earth  from  one 
end  of  the  country  to  the  other  with  ugly  buildings  which  are 
the  despair  of  architectural  reformers. 
The  Law  §  38.  Closely  related  to  the  law  of  diminishing  utility  is  the 

law  of  demand.  Since  successive  units  of  any  good  satisfy  less 
and  less  intense  wants,  the  desire  for  successive  units  di- 
minishes. Demand,  as  the  term  is  used  in  economics,  denotes 
effective  desire,  that  is,  desire  coupled  with  ability  to  pay  the 
current  price  for  the  desired  object.  The  general  law  of  de- 
mand is  that  it  varies  directly  with  changes  in  the  intensity  of 
Vv'ants  and  inversely  with  changes  in  the  prices  that  must  be 
paid  for  goods.  To  illustrate,  the  development  of  a  new  taste 
increases  a  person's  demand  for  the  good  capable  of  satisfying 
that  taste.  More  of  that  good  will  be  purchased  even  though 
its  price  remains  as  before.  On  the  other  hand,  even  though 
a  person's  taste  be  unchanged  he  will  be  inclined  to  purchase 
more  of  a  good  whose  price  is  reduced. 

When  demand  increases  or  decreases  readily  in  response  to 
price  changes  it  is  said  to  be  elastic.  This  is  the  case  with  the 
demand  for  goods  which  are  on  the  border  line  between  neces- 
saries and  comforts.  A  slight  fall  in  the  price  of  such  goods 
brings  them  within  the  reach  of  many  consumers  who  before 
could  not  afford  them.  At  the  other  extreme  are  the  very 
cheap  necessaries  used  by  all  classes,  such  as  potatoes,  salt, 
sugar,  etc.,  in  the  United  States.  A  fall  in  the  price  of  such 
goods  will  not  increase  the  demand  for  them  materially  because 
everyone  is  already  consuming  them  nearly  down  to  the  point 
of  satiety.  Where  the  conditions  of  production  are  variable, 
the  costs  of  transportation  prohibitive  of  shipment  to  distant 
markets,  and  the  product  itself  perishable,  it  may,  and  often 
does,  happen  that  the  supply  of  goods  for  which  the  demand  is 
inelastic  exceeds  the  demand  even  at  the  lowest  prices.  At 
such  times  such  goods  become  a  drug  in  the  market  and  any- 


The  Law  of  Variety  67 

one  may  have  them  who  will  go  to  the  trouble  of  carrying  them 
away.  This  situation  is  not  unusual  in  country  districts  in  the 
United  States  with  reference  to  such  staple  crops  as  potatoes 
and  apples.  The  elasticity  of  the  demand  for  a  good  thus  has 
an  important  bearing  upon  the  risks  connected  with  its  produc- 
tion. Elasticity  of  demand  means  stability  of  prices,  inelas- 
ticity variability.  To  escape  the  latter  in  the  case  of  commodi- 
ties like  salt,  sugar,  etc.,  for  which  the  demand  is  quite  in- 
elastic, has  been  a  principal  motive  leading  to  the  organisation 
of  some  of  the  trusts  discussed  in  Chapter  XXV. 

§  39.  The  normal  purpose  of  consumption  is  to  afford  pleas-  The  Law 
ure.  Since  each  kind  of  good  is  subject  to  the  law  of  diminish-  ^  anetv 
ing  utility,  the  pleasures  of  consumption  may  be  increased  by  at- 
tention to  the  law  of  variety.  If  a  man  has  only  corn  bread 
for  breakfast,  to  satisfy  his  hunger  he  must  push  his  consump- 
tion of  it  beyond  the  point  where  it  afifords  him  appreciable 
satisfaction.  If  to  his  corn  bread  are  added  bacon,  eggs,  and 
coffee,  he  will  be  able  to  supply  his  body  with  adequate  nour- 
ishment, without  being  obliged  to  eat  corn  bread  after  he  has 
ceased  to  relish  it.  Eating  has  been  taken  to  illustrate  the  law 
of  variety  because  it  is  a  universal  experience,  but  the  law  ap- 
plies equally  well  to  other  forms  of  consumption.  It  is  really 
a  corollary  of  the  law  of  diminishing  utility,  since  that  law 
itself  suggests  the  necessity  of  passing  from  one  form  of  con- 
sumption to  another  to  avoid  the  uncomfortable  feeling  of 
satiety.  The  ideal  which  the  economic  man  should,  and  does 
unconsciously,  have  in  mind  is  that  of  carrying  each  kind  of 
consumption  only  to  the  point  where  it  becomes  less  pleasur- 
able than  another  form  of  consumption  that  may  be  enjoyed  at 
the  same  expense.  By  changing  to  the  new  form  of  consump- 
tion whenever  it  affords  the  more  pleasure,  he  is  able  to  get 
the  maximum  satisfaction  permitted  by  his  income. 

The  great  obstacle  to  varied  consumption  is  the  expense  of 
a  varied  assortment  of  goods,  and  this  is  felt  most  keenly  where 
men  live  in  comparative  isolation.  Homesteaders  in  the 
western  part  of  the  United  States,  and  others  in  similar  situa- 
tions, have  to  content  themselves  with  rough  and  simple  fare, 
clothing,  etc.,  because  it  does  not  pay  them  to  make,  in  the  small 
quantities  adapted  to  their  wants,  those  little  things  which  con- 


68  The  Consumption  of  Wealth 

tribute  so  much  to  the  refinement  of  Hfe.  Every  advance 
which  tends  to  bring  people  into  closer  industrial  relations  is 
favourable  to  a  more  varied  consumption  and  consequently  to 
an  increase  in  well-being.  Recent  improvements  in  transpor- 
tation facilities  encourage  the  hope  that  the  varied  markets  of 
the  city  will  one  day  be  brought  within  the  reach  of  every 
country  family,  while  city  families  will  be  given  opportunities 
to  share  the  free  goods  of  the  country.  Such  an  arrangement 
will  add  enormously  to  the  general  well-being. 
The  Law  of  §  40.  Next  to  the  principle  of  variety  as  a  guide  to  judicious 
consumption  stands  the  principle  of  harmony.  Harmony  of 
colour  and  form  in  dress  is  indispensable  to  a  pleasing  effect. 
In  sculpture,  painting,  architecture,  and  music,  harmony  is  the 
all-important  requisite.  Even  in  eating  harmonious  combina- 
tions are  important,  as  is  attested  by  the  pangs  of  indigestion 
which  follow  the  consumption  of  such  combinations  as  candy 
and  beer,  or  milk  and  lobster.  In  a  comparatively  new  country^ 
like  the  United  States  the  average  man  is  more  likely  to  ignore 
the  law  of  harmony  than  the  law  of  variety.  The  American 
tendency  is  to  exaggerate  the  importance  of  quantity  and  size 
to  the  neglect  of  the  subtle  harmonies  which  alone  give  perma- 
nent satisfaction.  As  a  result  there  is  relatively  little  demand 
in  the  United  States  for  the  taste  and  talent  of  artists  and  skilled 
artisans  and  great  demand  for  the  uniform  and  too  frequently 
ugly  products  of  machinery.  Through  this  perversion  of  taste 
consumers  lose  half  the  pleasure  which  their  incomes  are  capa- 
ble of  affording.  The  effect  on  producers  is  equally  unfavour- 
able for  reasons  explained  in  the  next  section. 

The  Law  §  41.  A  third  aspect  of  consumption  involves  its  relation  to 

of  Least  ,.  t--  1  •  11  f-^ 

Social  Cost  production,     it  is  important,  by  attention  to  the  laws  01  variety 

and  harmony,  to  obtain  the  largest  possible  return  from  the 
stocks  of  goods  available  for  consumption.  It  is  equally  im- 
portant while  securing  a  given  return  of  pleasure  from  con- 
sumption, to  select  those  goods  which  can  be  produced  with 
the  least  expenditure  of  effort.  This  is  the  principle  of  least 
social  cost.  Its  first  application  has  reference  to  the  natural 
conditions  of  a  country. 

Economic  progress  depends  in  part  on  the  adaptation  of 
men's  wants   to   the   productive   capacities   of   the   particular 


The  Law  of  Least  Social  Cost  69 

resrions  which  they  inhabit.     Wlien  colonists  settle  in  a  new  Adaptation 
cotmtry  they  bring  with  them  a  taste  for  the  commodities  they  ^'un;p"i',,n 
were  used  to  at  home.     The  soil  and  climate  of  their  new  en-  to  the  En- 
vironment are  rarely  suited  to  the  production  of  these  identical  ^'ironment 
things,  and  hence  their  well-being  depends  for  some  time  on 
the  readiness  with  which  they  learn  to  like  things  for  which 
the  new  soil  and  climate  are  suited.     But  men  do  not  give  up 
settled  habits  easily.     They  waste  much  time  and  effort  in  try- 
ing to  make  the  land  produce  what  they  like,  in  place  of  learn- 
ing to  like  what  the  land  can  best  produce.     Thus  in  America 
it  took  the  early  settlers  a  long  time  to  substitute  a  diet  of  In- 
dian corn  for  the  diet  of  wheat  and  rye  to  which  they  had  been 
accustomed  in  Europe,  and  many  of  their  early  disappoint- 
ments were  due  to  their  unsuccessful  efforts  to  produce  the 
latter. 

The  law  of  least  social  cost  prescribes  consumption  adapted 
to  the  productive  capabilities  of  the  environment.  Obedience 
to  it  is  brought  about  in  time  by  an  evolutionary  process. 
Those  who  learn  to  like  the  things  that  can  be  most  easily  pro- 
duced where  they  live  and  to  thrive  on  them,  have  an  advan- 
tage over  their  neighbours.  In  time  their  oft'spring  multiply 
and  people  the  land.  But  the  process  may  be  hastened  by  in- 
telligent experiment,  as  has  been  repeatedly  demonstrated  in  the 
industrial  development  of  the  United  States. 

A  second  application  of  the  principle  of  least  social  cost  Adaptation 
refers  to  differences  in  the  capacities  and  tastes  of  producers.  Producers 
Its  importance  may  be  shown  by  means  of  an  example.  Klotz 
is  a  poor  German  who  has  come  to  the  United  States  with  a 
talent  for  playing  the  violin  and  some  knowledge  of  shoemak- 
ing  as  his  stock  in  trade.  He  settles  in  a  town  where  there  is 
little  appreciation  for  music,  and  must  therefore  become  a  shoe- 
maker. The  work  is  hard  and  uninteresting.  Every  day  he 
thinks  how  much  pleasanter  it  would  be  to  play  his  violin,  but 
he  must  stick  to  his  last  or  starve.  As  time  goes  on  the  town 
grows  and  people  come  to  be  Klotz's  neighbours  who  appre- 
ciate his  violin  playing  even  more  than  his  shoemaking. 
Through  their  efforts  a  small  orchestra  is  organised  with  Klotz 
as  leader,  and  it  is  not  long  before  fondness  for  the  music  this 
orchestra  can  produce  has  become  so  general  thiat  Klotz  finds 


yo  The  Con'sumption  of  Wealth 

that  he  can  discard  his  leather  apron  entirely  and  give  all  of 
his  time  to  the  work  that  is  his  pleasure  as  well  as  his  means 
of  livelihood.  By  a  change  of  taste  in  the  community  a  discon- 
tented shoemaker  is  transformed  into  a  happy  musician.  If 
the  change  has  been  genuine  the  community  gets  a  full  return 
for  what  it  gives  Klotz  for  his  music.  It  affords  as  much  if 
not  more  pleasure  than  did  the  shoes  which  Klotz  used  to 
make,  but  added  to  this  pleasure  of  consumers  is  the  new- 
found happiness  of  Klotz,  the  producer. 
Progress  As  this  illustration  suggests,  the  things  that  people  want 

Changes  in  ^"^  ^^^  willing  to  pay  for  are  the  things  that  must  be  produced. 
Taste  As  consumers  the  members  of  society  determine  how  they 

shall  as  producers  spend  their  time  and  effort.  As  regards  the 
necessaries  of  life  consum.ers  have  perhaps  no  very  great  range 
of  choice.  They  must  learn  to  like  those  things  that  can  be 
produced  most  easily  in  the  given  environment.  If  Klotz,  the 
musician,  gives  up  making  shoes,  someone  else,  who  finds  the 
task  more  congenial,  must  make  them.  But  only  a  part  of  the 
community's  income  is  spent  for  necessaries.  If  it  prefers  as 
comforts  and  luxuries  articles  which  can  be  most  advantage- 
ously produced  in  factories  where  automatic  machinery  im- 
presses its  standards  of  unvarying  uniformity  not  only  upon 
the  products  turned  out,  but  also  upon  the  operatives  engaged 
in  making  these  products,  then  the  ranks  of  factory  labour 
must  be  crowded  and  other  occupations  must  be  neglected.  If, 
on  the  other  hand,  it  prefers  music  and  objects  of  beauty,  each 
one,  however  simple,  reflecting  the  individuality  of  the  artisan 
who  has  fashioned  it  with  loving  thought,  then  musicians, 
artists,  and  artisans  will  find  remunerative  employment  and 
quite  a  different  tone  will  be  given  to  the  common  industrial 
life.  A  community's  taste  thus  gives  direction  to  its  work  and 
decides  for  better  or  for  worse  the  kinds  of  lives  that  its 
members  shall  live. 
Adaptation  The  law  of  least  social  cost  has  still  another  application.  As 
Economi-      will  be  shown  in  a  later  chapter  *  the  principle  that  large-scale 

eal  Produc-  production  is  more  economical  than  small-scale  production  is 
tion  ...  .  T  .  1 

subject  to  important  exceptions,    in  some  cases,  as  for  example 

in  the  production  of  agricultural  products  from  a  limited  area, 

*  Chapter  VI. 


Economical   Consumption  71 

after  cultivation  has  been  carried  to  a  certain  point,  to  secure 
more  products  requires  more  rather  than  less  proportionate 
labour.  From  the  point  of  view  of  social  cost  it  is  obvious 
that  increased  consumption  of  articles  of  this  sort  is  less  advan- 
tageous than  increased  consumption  of  commodities  whose 
cost  decreases  as  the  quantity  produced  grows. 

The  point  that  it  is  important  to  note  in  connection  with  each 
of  the  applications  of  the  law  of  least  social  cost  that  have  been 
given,  is  that  the  reduction  of  cost  which  may  be  secured  by  a 
simple  change  of  wants  involves  no  corresponding  reduction 
in  the  pleasures  of  consumption.  Consumers  continue  to  be 
as  well  ofif  as  before,  while  producers  are  better  oft.  Thus 
changes  in  wants  may  add  to  economic  well-being  just  as 
efifectively  as  changes  in  methods  of  production  and  are  quite 
as  worthy  of  the  attention  of  economists. 

§  42.  The  most  obvious  relation  between  consumption  and  Economi- 
production  grows  out  of  the  fact  that  consumers  are  also  pro-  sumption 
ducers,  and  what  they  eat,  drink,  and  wear,  the  houses  they  live 
in,  and  the  amusements  they  enjoy,  have  a  determining  influ- 
ence on  their  efficiency.  The  ways  in  which  different  forms  of 
consumption  aft'ect  productive  efficiency  are  more  properly 
treated  in  the  chapters  on  production.  At  this  point  attention 
will  be  called  merely  to  the  economy  of  different  lines  of  ex- 
penditure, especially  expenditures  for  food. 

Through  careful  experiments  physiologists  have  ascertained 
with  some  degree  of  accuracy  the  amount  of  nutrition  which 
the  average  man  requires  each  day  when  engaged  in  different  , 
kinds  of  work.  It  is  customary  to  express  this  as  so  many 
calories  *  of  heat  energy,  including  so  many  grammes  of  the 
indispensable  protein  or  tissue-building  compounds.  The  daily 
allowance  made  for  the  average  man  at  moderate  muscular 
work  by  Professor  Atwater,  an  American  authority  in  this 
field  of  investigation,  is  3500  calories,  including  at  least  125 
grammes  of  protein  compounds.  Men  at  hard  labour  and  ath- 
letes in  training  require  more,  while  brain  workers  appear  to 
require  somewhat  less. 

Having  established  a  standard,  the  next  step  is  to  analyse 

*  A  calorie  is  the  amount  of  heat  energ>'  required  to  raise  one  gram 
of  water  1°  Centigrade. 


Nutritive 
Value  of 
Different 
Foods 


Luxury 


72  The  Consumption  of  Wealth 

different  kinds  of  food  to  ascertain  their  nutritive  value.  Such 
analyses  have  now  been  maae  of  more  than  two  hundred  of  the 
dift"erent  foods  in  ordinary  use  in  the  United  States.*  Eco- 
nomical consumption  is  secured  when  the  cheapest  combina- 
tion of  foods  containing  the  required  ingredients  and  both 
palatable  and  digestible  for  the  given  consumer,  is  selected. 
No  general  rules  can  be  laid  down  because  of  differences  in 
the  tastes  and  incomes  of  dift'erent  consumers,  but  it  is  inter- 
esting to  note  the  relation  in  which  the  food  values  of  different 
foods  stand  to  their  cost.  Professor  Atwater  has  drawn  up  a 
tablet  giving  the  quantity  of  each  of  several  different  kinds  of 
food  which  might  have  been  purchased  for  ten  cents  on  a  given 
day  in  New  York  City,  and  the  amount  of  nutrition  which  each 
contained.  From  this  it  appears  that  from  the  point  of  view 
of  protein  contents  the  most  economical  foods  were  prepara- 
tions of  wheat,  corn,  beans,  oatmeal,  beef  for  stewing,  and  salt 
cod,  while  from  the  point  of  view  of  potential  heat  energy  the 
most  economical  were  wheat  flour,  cornmeal,  oatmeal,  potatoes, 
beans,  salt  pork,  and  sugar.  The  table  seems,  on  the  whole, 
to  bear  out  the  common  impression  that  a  vegetable  diet  is  much 
more  economical  than  a  diet  consisting  largely  of  meat,  and  that 
the  cereals,  wheat,  corn,  beans,  and  oats,  are  the  most  eco- 
nomical of  the  vegetables. 

Science  has,  until  recently,  done  very  little  to  aid  the  ordinary 
man  to  direct  his  consumption  wisely  and  economically, 
although  every  investigation  into  the  consuming  habits  of  the 
poorer  classes  reveals  the  fact  that,  small  as  are  their  incomes, 
a  considerable  part  is  wasted  because  the  most  economical  foods, 
clothing,  etc.,  are  not  selected.  The  importance  of  this  phase 
of  domestic  economics  is  now  fully  appreciated  and  there  is 
every  indication  that  rapid  progress  is  being  made,  especially 
in  the  larger  cities,  towards  making  consumption  economical. 

§  43.  Closely  related  to  the  question  of  economy  in  consump- 
tion is  the  question  of  luxury.  As  wealth  is  now  distributed, 
the  majority  of  families  in  every  com.munity  must  be  eco- 
nomical in  order  to  secure  with  their  limited  incomes  the  neces- 
saries and  ordinary  comforts  of  life.     Contrasted  with  them 

*Cf.    Atwater,  Farmer's  Bulletin,  No.  14.2. 
f  Ibid.,  p.  40. 


Luxury  73 

are  the  smaller  number  of  families  whose  incomes  are  large 
enough  to  permit  the  enjoyment  of  luxuries.  The  question 
whether  under  such  circumstances  expenditure  for  luxuries  is 
defensible  is  a  question  of  morals  rather  than  of  economics, 
but  the  economist  may  well  be  called  upon  to  decide  which  ol 
the  possible  uses  of  surplus  income  available  for  luxuries  is 
calculated  to  contribute  most  largely  to  the  general  well-being. 

To  give  precision  to  the  discussion,  luxuries  may  be  defined 
as  all  economic  goods  which  are  not  necessaries.  The  latter 
term  includes  not  merely  the  food,  clothing,  and  shelter  neces- 
sary to  life,  but  the  entire  complex  of  goods  which  each  indus- 
trial class  finds  necessary  to  its  industrial  efficiency.  The  deci- 
sion as  to  what  these  goods  are  is  not  to  be  made  by  reference 
to  any  absolute  standard,  but  through  study  of  each  class 
affected.  For  example,  manual  labourers  in  the  United  States 
would  certainly  include  tobacco  among  the  necessaries  of  life 
and  the  economist  should  include  it  also  in  discussing  their 
problems,  for  the  simple  reason  that  the  average  manual 
labourer  would  continue  to  buy  tobacco  even  though  his  earn- 
ings were  too  small  to  allow  him  to  buy  in  addition  goods  indis- 
pensable to  his  industrial  efficiency.  Tobacco  is  to  him  a  "  con- 
ventional necessary."  A  formal  definition  of  economic  neces- 
saries would  thus  be :  the  things  absolutely  essential  to  the  in- 
dustrial efficiency  of  the  average  family  in  the  class  considered, 
together  with  the  things  that  are  preferred  above  the  absolute 
necessaries  by  the  member  of  the  family  who  directs  its  con- 
sumption. 

It  is  obvious  from  the  above  definition  that  failure  on  the  Neces- 

part  of  any  family  to  secure  the  necessaries  of  life  is  injurious,  ^,^,"f^/°'' 
,.,,,,  .  AH  before 

not  only  to  it,  but  to  the  whole  community.     Under-consump-  Luxuries 

tion  means  under-nutrition  and  loss  in  industrial  efficiency.  If  ^°''  ^"^ 
permitted  to  continue  it  must  inevitably  undermine  the  stand- 
ards which  make  a  family  self-supporting  and  self-sufficient 
and  reduce  its  members  to  dependency.  The  general  interest 
requires,  therefore,  acceptance  of  the  maxim :  the  consumption 
of  luxuries  should  be  deferred  until  all  are  provided  with  neces- 
saries. This  is  a  moral  principle  that  commends  itself  to  all 
civilised  communities  and  finds  indirect  expression  in  positive 
law.     The  obstacle  to  its  practical  application  is  the  difficulty 


74 


The  Consumption  of  Wealth 


The  Point 
of  View- 


Fallacies 

Respecting 

i.uxury 


of  supplementing  the  incomes  of  independent  families,  when 
those  incomes  are  insufficient,  without  undermining  their  in- 
dependence or  permanently  lowering  their  earning  power. 
Among  the  measures  that  have  been  taken  to  surmount  this 
obstacle  are  different  plans  of  industrial  insurance,  by  means  of 
which  the  families  of  workingmen  are  assured  necessaries  in 
times  of  illness,  and  the  erection  of  government  employment 
establishments  in  which  those  in  search  of  work  may  earn 
necessaries  while  they  are  looking  for  other  positions. 

In  the  United  States,  in  times  of  ordinary  prosperity,  all  but 
the  very  lowest  in  the  industrial  scale  have  not  only  sufficient 
income  to  provide  for  necessaries,  but  some  surplus  income. 
Assuming  that  necessaries  are  assured  to  everyone,  the  question 
arises  as  to  the  use  to  which  surplus  income  may  most  econom- 
ically be  put.  According  to  strict  utilitarian  doctrine — which 
is  another  name  for  economic  morality — the  happiness  of  any 
one  person  is  just  as  important  quantity  for  quantity  and  quality 
for  quality  as  the  happiness  of  any  other,  and  hence  surplus 
incomes  should  be  used  so  as  to  add  equally  to  the  happiness  of 
all.  This  suggests  that  no  one  is  justified  in  spending  income 
for  a  luxury  for  himself  or  his  family  which  will  afford  less 
happiness  than  would  the  same  income  spent  for  a  luxury  for 
someone  else  or  for  some  other  family.  The  difficulty  is  that 
independent,  self-respecting  people  do  not  want  luxuries  bought 
with  other  people's  money.  If  the  pleasures  connected  with 
economic  goods  are  to  be  equalised  it  must  be  in  some  round- 
about way.  Without  trying  to  exhaust  the  subject  a  few  words 
may  be  said  about  each  of  the  ways  in  which  surplus  incomes 
are  usually  employed. 

Notwithstanding  the  denunciation  of  moralists  it  is  still  true 
that  surplus  incomes  are  largely  expended  on  luxuries  for  the 
gratification  of  the  spender  himself,  his  family,  or  his  imme- 
diate friends.  In  justification  it  is  often  urged  by  superficial 
observers  that  such  expenditures  "  make  work  "  for  others  and 
hence  benefit  them  indirectly  if  not  directly.  This  argument 
can  be  presented  with  a  good  deal  of  plausibility  so  long  as  only 
the  one  use  of  the  income  under  consideration  is  thought  of. 
A  wealthy  man  gives  an  elaborate  ball.  In  connection  with  it 
he  employs  decorators,  caterers,  waiters,  etc.     Those  whom  he 


Fallacies  Respecting  Luxury  75 

invites  employ  dressmakers,  hairdressers,  etc.,  in  their  prepa- 
rations for  the  event.  The  expenditure  on  the  ball  thus  causes 
an  active  demand  for  laljour  of  various  kinds,  which,  but  for 
the  ball,  would  not  have  been  required.  Those  who  secure  em- 
ployment certainly  regard  such  an  entertainment  in  the  light  of 
a  blessing.  But  consider  other  uses  to  which  the  money  spent 
upon  the  ball  might  have  been  devoted.  Suppose  that  it  had 
been  given  to  a  wisely  administered  charitable  society  for  use 
in  improving  the  condition  of  the  poor.  In  such  an  event  it 
would  have  been  spent  also  largely  for  food,  clothing,  and  per- 
sonal service,  "  making  work  "  for  numerous  individuals  who 
might  otherwise  have  sought  in  vain  for  remunerative  employ- 
ment. So  far  as  its  effect  on  the  labour  market  as  a  whole  is 
concerned  it  would  certainly  convey  as  much  benefit  in  the 
second  case  as  in  the  first.  Similar  results  would  follow  its 
expenditure  in  any  other  rational  way.  Even  if  it  were  not 
spent  at  all,  but  allowed  to  accumulate  as  a  deposit  in  a  bank, 
there  is  reason  to  think  that  it  would  "  make  work  "  for  quite 
as  many  people  as  when  used  for  the  ball.  Banks  do  not  keep 
their  funds  in  their  vaults,  but  lend  them  out  at  interest  to  busi- 
ness men  who  employ  them  in  connection  with  their  businesses. 
This  usually  means  buying  materials,  hiring  workmen,  etc., 
and  has  as  favourable  an  effect  on  the  labour  market  as  luxur- 
ious expenditure.  Unless,  therefore,  the  transient  pleasure  of 
a  few  people  who  are  already  satiated  with  balls  and  similar 
diversions  is  to  be  esteemed  above  the  lasting  improvement  of 
a  great  many  people  whose  lives  are  all  too  bare  of  sunshine, 
the  "  make-work  "  argument  can  hardly  be  held  to  justify 
selfish  luxury.  The  truth  is  that  any  rational  mode  of  using 
income  stimulates  certain  branches  of  industry  and  is  to  that 
extent  beneficial  to  the  small  class  of  producers  concerned. 
Money  income  represents  an  unassigned  share  in  society's  lim- 
ited store  of  economic  goods.  If  that  share  is  taken  and  con- 
sumed in  a  form  that  affords  little  happiness,  society  is  so  much 
the  worse  oft'  than  if  it  had  been  taken  in  a  form  that  afforded 
much  happiness. 

But,  it  should  be  added,  there  are  luxuries  and  luxuries.  Defensible 
Those  who  have  large  incomes  to  administer  may  contribute     ^^^^V 
much  to  social  progress  by  setting  standards  of  rational  enjoy- 


76  The  Consumption  of  Wealth 

ment  for  others  to  imitate.  The  rich  man  who  wishes  to  live 
in  a  grand  way  does  the  community  Httle  good  if  he  buries  him- 
self like  a  hermit  in  an  ugly  palace.  If,  on  the  contrary,  he 
builds  a  beautiful  house  to  which  a  large  and  democratic  circle 
of  friends  is  welcome,  he  may  do  quite  as  much  good  as  he 
could  by  giving  his  income  in  charity. 

Saving  vs.        §  44.  A  third  use  which  many  economists  still  urge  as  the 
Spending       1      .  .         1  •  1  1       •  ,  .  .  ,  . 

best  to  which  surplus  m'come  may  be  put,  is  saving  and  invest- 
ment. In  contrast  to  purely  selfish  luxury,  saving  deserves  all 
of  the  praise  it  has  received.  Wise  investment  adds  to  society's 
material  equipment  of  tools,  machinery,  buildings,  etc.,  for 
the  production  of  economic  goods.  Hence  it  lightens  the  toil 
necessary  to  the  realisation  of  a  certain  productive  result. 
Even  more  important  is  the  fact  that,  through  saving,  a  family 
may  make  itself  economically  independent,  not  in  order  that  it 
may  turn  its  attention  from  useful  industry,  but  that  it  may 
devote  itself  to  the  work  that  most  needs  to  be  done  even 
though  the  world  has  not  yet  learned  to  appreciate  it  and  re- 
munerate it  in  proportion  to  its  importance. 

It  may  be  doubted  whether,  under  present  conditions,  saving 
beyond  what  is  necessary  to  assure  economic  independence  ben- 
efits the  world  as  much  as  would  wise  spending  for  some  social 
object.  Great  wealth  is  almost  if  not  quite  as  demoralising  as 
great  poverty,  and  the  man  who  really  desires  to  contribute  to 
social  improvement  will  put  a  check  upon  his  accumulations 
and  give  his  time  and  thought  to  spending  such  income  as  he 
does  not  require  for  his  own  family  in  ways  that  will  benefit 
others.  If  he  continues  to  save  he  must  finally,  in  drafting  his 
will,  face  the  problem  of  the  best  use  of  wealth.  Passing  on 
to  his  heirs  more  than  is  necessary  to  insure  them  economic 
independence  is  merely  evading  an  issue  which  each  should 
face  squarely  for  himself. 
Statistics  of  §  45.  It  is  much  easier  to  ascertain  how  men  earn  their  in- 
tion  comes  and  how  much  their  incomes  are,  than  how  they  spend 

them.  In  fact  few  families  have  very  exact  knowledge  on  the 
latter  point  themselves.  They  know  how  much  they  pay  for 
house  rent,  perhaps  how  much  they  spend  for  coal  and  gas.  but 
few  keep  accurate  accounts  of  their  expenditures  for  food, 
clothing,  and  the  incidentals  that  are  an  important  element  in 


Consumption  in  the  United  States         77 

all  but  the  humblest  budgets.  Nevertheless  several  useful  in- 
vestigations into  statistics  of  consumption  have  been  made  and 
certain  general  relations  have  been  established.  About  the 
middle  of  the  last  century  inquiries  were  made  in  Belgium  and 
Saxony  into  the  expenditures  of  different  families,  and  upon 
them  two  economists,  Ducpetiaux  and  Engel,  based  the  follow- 
ing table  showing  the  proportional  expenditures  of  different 
classes  for  different  purposes  in  the  two  countries : 


Table  of  Expt 

'ndifnr/%  of 

a 

Salf-supporting              Middle-class 

Well-to-do 

Labourer's  Family 

Family 

Family 

in 

in 

in 

Belgium                Saxony 

Saxony 

Saxony 

Food,    . 

.   tl%' 

(^2%^ 

555?" 

502;" 

Clothing, 
Rent,    . 

.15 

.    10 

12 

12 

::  i«'* 

Fuel  and  light. 

•     5    J 

5j 

5    . 

5 , 

Tools,  etc.,  . 

•     4 

Education,   . 

.     2                          2 

3-5 

5-5 

Taxation, 

.      I                            Z 

2 

3 

Care  of  health. 

.      I                            1 

2 

3 

Personal  service,     i 

z 

2.5 

3-5 

This  table  does  little  more  than  to  confirm  general  observa- 
tion, but  when  it  is  considered  how  often  general  observation 
leads  to  false  conclusions  even  such  confirmation  is  of  value. 
Wage-earners  spend  nearly  all  of  their  incomes  in  providing 
for  the  satisfaction  of  their  merely  physical  wants.  They  have 
little  left  for  the  higher  needs  of  their  natures,  and  if  these  are 
to  be  cared  for  it  must  be  through  community  action  realising 
itself  in  free  public  schools,  free  playgrounds  and  parks,  free 
concerts,  free  lectures,  etc.  People  in  more  comfortable  cir- 
cumstances spend  relatively  less  for  food  and  relatively  more 
for  education  and  personal  service.  Expenditures  for  cloth- 
ing and  rent  show  no  diminution,  probably  because  clothes  and 
houses  are  regarded  as  marks  of  social  position  and  .the  desire 
for  social  esteem  is  so  strong  that  a  large  part  of  surplus  in- 
come is  devoted  to  keeping  up  appearances. 

A  more  recent  investigation  into  statistics  of  consumption  Consump- 

was  made  bv  tlie  United  States  Department  of  Labour  to  ascer-  \}?^.  "i_,the 

.     ■  '  L  nited 

tarn  the  nnportance  of  different  kinds  of  commodities  in  the  States 


78 


The  Consumption  of  Wealth 


everyday  life  of  representative  families.     The  results  of  this 
inquiry  are  summarised  in  the  following  table : 

ExpetiditJires  of  Representative  Aniericati  Families* 

Percentage  of  Expenditure  for 


' 

Fuel  and 

All  Other 

Family  Income 

Food 

Rent 

Clothing 

Lighting 

Purposes 

Under  $200 

49.6 

15-5 

12.8 

8.1 

14.0 

$  200-300 

44-3 

14-7 

14-3 

7 

6 

19.1 

300-400 

45.6 

I5-0 

14. 1 

7 

0 

18.3 

400-500 

45-1 

15-3 

14.4 

6 

6 

18.6 

500-600 

43-8 

15.2 

15-3 

6 

6 

I9.I 

600-700 

41.2 

15-5 

15-9 

5 

9 

21.5 

700-800 

38.9 

15.6 

16.3 

5 

3 

239 

800-900 

3S.1 

16.1 

15. 1 

5 

3 

25-4 

900-1000 

34-3 

14.9 

16.8 

4 

7 

293 

lOOO-IIOO 

34.7 

15. 1 

17.5 

4 

5 

28.2 

iioa-1200 

30.7 

12.2 

16.5 

3 

9 

36.7 

1200  and  over 

28.6 

12.6 

15-7 

3 

0 

40.1 

All  sizes 

41. 1 

15. 1 

15-3 

5 

9 

22.6 

Family- 
Budgets 


This  table  is  based  on  a  study  of  as  many  as  2562  family 
budgets  and  is  even  more  suggestive  than  the  former  because 
of  its  more  careful  classification  of  expenditures  according  to 
the  family  income.  It  indicates  the  same  general  relations. 
Expenditures  for  food  diminish  relatively  as  the  family  income 
grows,  and  the  difference  is  made  up  by  a  relative  increase  in 
the  expenditures  for  the  satisfaction  of  other  than  merely 
physical  wants.  Expenditures  for  rent  bear  a  fairly  constant 
relation  to  the  total  income,  while  expenditures  for  clothing 
show  a  tendency  to  increase  slightly. 

Other  interesting  inquiries  into  family  expenditures  recently 
made  are  referred  to  at  the  end  of  the  chapter.  That  pub- 
lished under  the  title  Family  Budgets  gives  an  account  of  the 
expenditures  of  typical  working-class  families  in  England,  and 
is  interesting  because  it  emphasises  the  differences  to  be  found 
in  the  consuming  habits  of  families  even  in  the  same  industrial 
and  social  class.  This  indicates  that  a  very  large  number  of 
budgets  must  be  compared  to  prevent  individual  differences 
from  giving  a  false  bias  to  the  investigation. 

There  is  perhaps  no  branch  of  economics  so  much  in  need 

♦  Seventh  Annual  Report  of  the  Department  of  Labour,  1891,  p.  864 


Conclusion  79 

of  development  as  that  dealing  with  the  statistics  of  consump- 
tion. A  first  step  towards  fuller  knowledge  in  this  department 
of  the  subject  would  be  to  induce  representative  families  to 
keep  accounts  in  accordance  with  some  simple  plan,  so  that  in- 
formation might  be  obtained  upon  which  to  base  statistical 
comparisons.  Residents  in  Social  Settlements  may  do  useful 
work  in  this  field  by  supplying  their  neighbours  with  handy 
account-books  and  directing  them  in  keeping  records  of  their 
expenditures.  Such  records  would  be  valuable  for  compari- 
son with  other  calculations,  and  also  the  habit  of  keeping  them 
would  be  found  a  help  in  determining  how  income  might  be 
best  employed. 

§  46.  The  subject  of  consumption  may  be  looked  at  eco-  Two 
nomically  in  two  different  ways.  The  more  familiar  way  is  to  Consump^- 
regard  it  as  the  goal  of  economic  activity  and  to  show  how  the  tion 
desire  for  goods  causes  them  to  have  value  and  price  and  in- 
duces people  to  engage  in  industrial  pursuits.  Though  per- 
fectly valid  as  far  as  it  goes,  this  aspect  of  consumption  must 
not  be  exaggerated.  The  other  w-ay  of  looking  at  it  is  as  a 
means  of  restoring  energy.  The  consumption  of  goods  neces- 
sary to  efficiency  is  not  merely  an  end ;  it  is  a  means  to  further 
production.  Human  beings  are  not  mere  goods-consuming 
automatons.  They  enjoy  activity  for  its  own  sake,  and  the 
more  highly  developed  they  are,  the  more  they  are  likely  to  look 
upon  goods  as  means  to  the  forms  of  activity  they  prefer, 
rather  than  as  ends  in  themselves.  It  follows  that  desire  for 
goods  is  only  one,  if  the  most  important,  of  the  motives  which 
control  the  economic  man.  Desire  for  activity  is  another 
motive  which  in  individual  instances  quite  outweighs  the  de- 
sire for  goods. 

At  the  present  stage  of  human  and  social  development  the  Conclusion 
former  of  the  above  ways  of  regarding  consumption  is  believed 
to  be  the  more  accurate  and  helpful  to  an  understanding  of  eco- 
nomic phenomena.  The  latter  is,  however,  applicable  already 
to  many  individuals  and  classes  and  must  be  kept  in  view  in 
connection  with  all  problems  looking  to  the  future.  Economic 
phenomena  are  related  not  as  cause  and  effect  simply,  but  in  a 
continuous  circle  of  causation.  Men  produce,  that  is,  expend 
energy,  in  order  that  they  may  consume ;  but  they  consume. 


8o  The  Consumption  of  Wealth 

that  is,  store  up  energy,  in  order  that  they  may  again  plunge 
into  the  activities  of  production.  The  ideal  round  is  one  in 
which  the  pleasures  of  production  are  as  definite  and  real  as  the 
pleasures  of  consumption.  Unfortunately  the  conditions  of 
production  are  still  so  arduous  for  the  mass  of  men  that  work 
is  usually  entered  upon  unwillingly  and  only  under  the  stimulus 
of  the  prospect  of  pay.  In  the  thought  of  the  average  man 
consumption,  or  the  desire  to  consume,  thus  stands  as  the 
motive  for  production.  In  the  following  chapters  the  point  of 
view  of  the  average  man  is  accepted,  and  economic  phenomena 
are  explained  by  reference  to  it.  The  other  point  of  view 
which  finds  work  a  joy,  and  goods  merely  aids  to  further  work, 
receives  attention  in  the  closing  chapter  on  Economic  Progress. 

REFERENCES  FOR   COLLATERAL   READING 

*Patien,  The  Consumption  of  Wealth,  and  Dynamic  Economics ; 
Hearn,  Plutology  ;  ^Marshall,  Principles  of  Economics,  Book  III.; 
Ely,  Outlines  of  Economics,  Book  II.,  Part  IV.;  Mayo-Smith, 
Statistics  and  Economics,  Book  I.,  Chap.  II.;  *Atwater,  Farmer's 
Bulletin,  No.  142,  published  by  the  U.  S.  Department  of  Agri- 
culture ;  Sixth  and  Seventh  Annual  Reports  of  the  United  States 
Department  of  Laboiir,  1890  and  1891  ;  Family  Budgets  collected 
by  the  Economic  Club  of  London,  1891-1S94;  *Rowntree,  Poverty, 
a  Study  of  Town  Life,  Chaps.  VI.,  VII.,  and  VIII.;  *  Fetter.  Prin- 
ciples of  Economics,  Chaps.  4  and  40. 


CHAPTER  V 
VALUE  AND    PRICE 

§  47.  As  already  explained,  the  term  value  is  used  in  eco- 
nomics in  two  different  senses,  one  subjective  or  pertaining  to 
the  relation  between  men  and  goods,  and  the  other  objective 
or  pertaining  to  the  relation  between  goods  and  goods.  We 
will  begin  this  chapter  with  an  analysis  of  the  principles  which 
govern  values  in  use,  or  values  in  the  first  sense,  and  consider 
then  the  relation  between  such  values  and  the  ratios  at  w'hich 
goods  exchange  for  each  other,  or  values  in  the  second  sense. 

As  a  first  illustration,  consider  the  mental  processes  by  wdiich  The  Valua- 
a  man  living  in  isolation,  like  Robinson  Crusoe  on  his  island,  crusoe 
values  some  of  his  possessions,  as,  for  example,  twenty  car- 
tridges he  was  able  to  save  from  the  wreck  together  with  his 
gun.  These  different  cartridges  may  be  put  to  uses  as  diverse 
as  that  of  protecting  their  possessor  from  the  attacks  of  hos- 
tile savages  and  that  of  supplying  his  table  with  small  birds  or 
squirrels.  Each  has  a  utility  determined  by  the  intensity  of 
the  want  which  it  is  to  satisfy.  In  all  probability  Crusoe  will 
decide  to  put  aside  a  few  cartridges  with  which  to  repel  attack. 
He  will  wish  to  employ  the  others  in  the  ways  that  will  con- 
tribute most  to  his  well-being.  If  there  are  deer  upon  the 
island  it  will  be  foolish  for  him  to  shoot  his  ammunition  away 
at  small  game.  Let  us  suppose  that  he  makes  up  his  mind  to 
put  aside  six  of  the  twenty  cartridges  and  to  use  all  the  rest 
for  deer  shooting.  If  the  herd  is  tame  and  he  is  a  good  shot, 
he  may  reasonably  count  on  killing  a  deer  with  each  cartridge, 
so  the  fourteen  shells  may  represent  in  his  calculations  four- 
teen deer  to  be  killed  from  time  to  time  as  he  may  require  them. 
These  will,  as  already  explained,  have  an  importance  to  him 
diminishing  as  the  time  to  elapse  before  they  are  to  be  con- 
sumed is  extended.*     At  the  head  of  the  list  stands  the  deer 

*  Chapter  IV.,  Section  36. 
8x 


82  Value  and  Price 

to  be  killed  to  furnish  a  steak  for  to-morrow's  dinner,  at  the 
foot  the  last  deer  to  be  shot  some  three  or  four  months  hence. 
The  latter  seems  of  such  slight  importance  at  present  that 
Crusoe  may  well  hesitate  between  saving  a  shell  for  it  and  try- 
ing his  hand  on  some  of  the  smaller  game  on  the  island. 
There  is  thus  a  series  of  utilities  corresponding  to  the  differ- 
ent cartridges  descending  from  the  immense  utilities  of  the 
cartridges  that  may  save  Crusoe's  life  to  the  small  utility 
of  that  which  is  to  supply  his  next  quarter's  venison.  Under 
these  circumstances  what  is  the  value  to  him  of  a  single  car- 
tridge ?  If  it  were  possible  we  might  expect  him  to  assign  dif- 
ferent values  to  the  different  cartridges,  but  since  they  are  all 
exactly  alike  this  would  be  an  absurdity.  He  must  have  one 
valuation  that  applies  indifferently  to  each  one  of  them.  Will 
this  value  of  a  single  cartridge  be  gauged  by  its  ability  to  pre- 
serve his  life  or  its  ability  to  kill  a  deer  for  him  three  months 
hence  ? 

Value  To  decide  the  above  question  it  is  only  necessary  to  consider 

in  L  se 

Depends  on  what   Crusoe   would   lose   if   a   cartridge   were   taken   away. 

Marginal  Clearly  this  loss  would  not  put  his  life  in  jeopardy,  as  he 
would  continue  as  before  to  save  the  half-dozen  with  which 
to  protect  himself.  As  surely  it  would  not  deprive  him  of  to- 
morrow's dinner.  As  a  rational  man  he  will  shift  it  to  the 
point  where  it  will  be  felt  least  and  forego,  since  he  must  forego 
something,  the  prospect  of  the  fourteenth  deer.  It  is,  there- 
fore, his  estimate  of  the  utility  of  this  least  useful  deer  that 
gauges  for  him  the  value  of  a  single  cartridge.  This  is  what 
he  loses  if  a  single  cartridge  is  lost ;  this  is  what  he  gains  by 
having  twenty  cartridges  instead  of  nineteen.  It,  accordingly, 
measures  the  importance  or  value  in  use  of  a  cartridge  to  him. 
Generalising  from  this  illustration  and  calling  the  least  utility 
of  a  single  unit  of  a  commodity  under  given  conditions  of 
supply  its  marginal  utility,  we  may  formulate  as  a  general  law 
the  principle  that  men  value  units  of  commodities  in  proportion 
to  their  marginal  iitilities.  Value,  in  the  first  sense,  is  thus 
man's  estimate  of  marginal  utility. 
Valuations  In  the  above  statem.ent  it  is  the  value  of  a  single  unit  of  a 
Units  of  commodity  that  is  referred  to  rather  than  that  of  the  com- 
Commodity  modity  as  a  whole,  and  this  corresponds  to  man's  habitual  mode 


Valuations  Refer  to  Units  of  Commodity    83 

of  making  valuations.  When  iron  is  said  to  be  less  valuable 
than  gold  it  is  meant  that  a  pound  of  iron  is  less  important  to 
man  than  a  pound  of  gold.  Every  change  in  the  supply  of  an 
economic  good  of  course  changes  its  marginal  utility  and 
therefore  its  value.  This  fact  makes  the  value  of  a  single  unit 
multiplied  by  the  available  supply  of  units  quite  misleading  as 
an  index  of  total  importance.  Tv^'enty  times  the  small  valua- 
tion Crusoe  put  on  a  single  cartridge  would  by  no  means 
represent  the  value  to  him  of  the  twenty  cartridges,  some  of 
which  were  as  precious  as  life  itself.  In  the  same  way,  multi- 
plying the  slight  value  of  a  pound  of  iron  by  the  number  of 
pounds  in  existence  would  give  a  total  representing  very  in- 
acfcquately  the  importance  of  iron  to  man.  If  an  approximate 
notion  of  the  importance  of  the  total  supply  of  a  commodity  is 
sought,  the  only  way  to  proceed  is  to  add  together  the  utilities 
of  all  of  the  different  units  used  by  man.  Such  a  calculation 
would  show,  of  course,  that  such  free  goods  as  air  and  water 
are  more  important  than  even  the  most  costly  economic  goods. 

In  the  above  illustration  an  ability  to  gauge  the  utilities  of  Valuation 

different  units  of  a  good  is  assumed  which  would  rarely  be  met  °/^  Crusoe 

...  .     ,   ,.?        T-  ^  -1  1-     •      1    1   •  Approxi- 

with  m  practical  life,     bven  a  Crusoe  with  unlimited  leisure  mate  only 

for  the  niceties  of  economic  calculation  would  have  to  content 
himself  with  comparative  rather  than  absolute  estimates  of  the 
Mtilities  of  his  different  cartridges.  He  could  say  with  con- 
fidence that  the  utilities  of  those  necessary  to  protect  his  life 
were  greater  than  of  those  to  supply  his  table.  He  could  also 
arrange  the  latter  in  a  scale  of  diminishing  utility  depending 
on  the  game  to  be  shot  and  the  remoteness  of  the  time  when 
it  was  to  be  needed.  His  determination  of  the  marginal  utility 
which  measures  the  value  of  a  single  unit  would  be  only  ap- 
proximate, however.  It  would  be  the  utility  of  a  fourteenth 
deer,  not  because  he  can  tell  just  what  that  utility  is,  but  be- 
cause he  knows  that  its  utility  is  on  the  one  hand  less  than  that 
of  the  thirteenth  deer  to  be  shot  with  the  next  to  the  last  car- 
tridge, and  on  the  other  greater  than  anything  else  which  he 
could  secure  with  the  fourteenth  cartridge.  Thus  in  all  cal- 
culations of  value  the  determination  of  marginal  utility  is  com- 
parative rather  than  absolute. 

§  48.  In  the  preceding  section  Crusoe's  valuation  of  a  com- 


84  Value  and  Price 

Marginal  modity  which  he  could  not  reproduce  upon  his  island  was  con- 
Value  sidered.  Much  more  frequent  must  have  been  his  valuations 
of  the  goods  which  he  could  produce.  Consider,  for  example, 
how  he  would  value  the  arrows  which  he  must  whittle  out 
laboriously  as  a  means  to  procuring  small  game.  Besides  the 
utility  of  these  arrows  there  would  be  in  his  mind  vivid  asso- 
ciations connected  with  the  cost  of  making  them.  In  fact  until 
he  became  quite  expert  with  the  bow  and  could  tell  quite  accu- 
rately what  an  arrow  was  worth  to  him  in  game,  he  probably 
valued  his  arrows  in  accordance  with  the  labour  they  cost  him. 
One  arrow  was  worth  perhaps  an  hour's  labour.  But  an 
hour's  labour,  from  the  point  of  view  of  the  sensations  that  ac- 
company it,  may  mean  anything  from  the  pleasurable  activity 
of  the  first  hour  after  a  refreshing  night's  sleep,  to  the  painful 
drudgery  of  the  last  hour  of  the  day  when  all  of  the  faculties 
are  crying  out  for  repose.  According  to  which  of  these  stand- 
ards is  the  importance  of  an  hour's  labour  gauged  ?  As  on  in- 
quiring before  which  utility  determines  value,  so  now  on  in- 
quiring which  disutility  of  those  which  stand  for  the  different 
hours  of  work  throughout  the  day  determines  cost,  we  must 
consider  what  Crusoe  would  gain  if  an  hour's  toil  were  spared 
him.  Obviously,  he  would  gain  most  by  stopping  work  an 
hour  earlier.  It  is  the  last  hour  of  the  day  that  involves  most 
disagreeable  effort  or  that  has  the  greatest  disutility.  If  an 
hour  is  to  be  cut  off  from  the  working  day  it  is  from  this  try- 
ing last  hour  that  one  would  wish  to  be  relieved.  It  stands  in 
the  mind  for  the  cost  of  an  hour's  work,  and  in  valuing  an 
arrow  according  to  its  cost  it  is  to  it  that  Crusoe's  thoughts 
would  revert.  If  we  call  the  disutility  of  this  last  hour  the 
marginal  disutility  we  may  say  that  the  value  of  a  good,  judged 
from  the  point  of  viezv  of  cost,  is  determined  by  the  marginal 
disutility  of  the  labour  time  necessary  to  its  production.  jMen 
who,  like  Robinson  Crusoe,  produce  for  themselves  the  things 
which  they  consume,  may  value  their  possessions  either  by 
reference  to  their  marginal  utilities  or  to  the  marginal  disutili- 
ties of  the  labour  involved  in  their  production.  It  is  hardly 
necessary  to  add  that  in  practice  the  determination  of  the  cost 
of  an  hour's  labour  is  comparative  rather  than  absolute,  just  as 
is  the  determination  of  the  utility  of  the  resulting  good. 


Total  Utility 


55 


Since  the  disutility  of  each  hour's  work  is  compensated  by 
the  utility  of  the  product  resulting  from  it,  the  tendency  of  the 
economic  man  is  to  continue  his  labour  until  the  disutility  it 
entails  is  just  balanced  by  the  utility  it  affords.  Every  addi- 
tion to  his  labour  increases  its  disutility,  every  addition  to  the 
product,  according-  to  the  familiar  principle,  diminishes  its 
utility.  At  some  point  disutility  will  cease  to  be  fully  com- 
pensated for  in  utility,  and  at  that  point  labour  must  stop  if 
an  economic  loss  is  to  be  averted. 

§  49.  The   contrast  between   pleasures   and   sacrifices   indi-  The 
cated  in  the  above  analysis  of  value  may  be  illustrated  graphi-  beuveen 
cally.     Let  distances  along  the  line  OX  in  the  following  figures  Utility  and 
represent  either  units  of  commodity  or  hours  of  labour,  and     '^^^'  '  ^ 
distances  along  the  perpendicular  line  OY  represent  the  utilities 
of  these  different  units  of  commodity  or  the  disutilities  of  the 
hours  of  labour.     Erecting  side  by  side  on  the  line  OX  and 
parallel  to  the  line  OY  narrow  parallelograms  representing  the 
diminishing  utilities  of  the  successive  units  of  commodity  re- 
sulting from  a  day's  work,  we  have  the  following  figure : 


O 


1    2 


4      5 

Fig.  I. 


6 


•X 


The  area  of  all  these  parallelograms  taken  together  repre- 
sents the  total  utility  of  all  of  the  products  of  the  day's  labour, 


86 


Value  and  Price 


and  it  will  involve  no  very  serious  error  to  represent  this  total 
area  as  bounded  by  a  curve  extending  from  the  Y  axis  to  the 
parallel  line  representing  the  marginal  utility  produced  during 
the  day,  as  follows : 

Y 

A 


0 


Total  Utility 


Fig.  2. 


c 


■X 


In  a  similar  way  narrow  parallelograms  representing  the 
increasing  disutilities  of  successive  hours  of  work  during  the 
day  may  be  erected  side  by  side  on  the  line  OX  and  parallel  to 
the  line  OY,  giving  the  following  figure: 


0 


Q 


u 
o 


4 


5 


G 


8 


■X 


Fig.  3. 


Relation  between  Utility  and  Disutility      87 

As  before,  this  may  be  simplified  by  combining  the  narrow 
parallelog-rams  into  an  irregular  area  bounded  by  a  curve,  as 
in  Figure  4 : 

Y 


Fig.  4 


If  the  exact  equilibrium  between  marginal  utility  and  mar- 
ginal disutility,  which  is  the  goal  of  economic  conduct,  is  real- 
ised, the  lines  BC  in  Figures  2  and  4  are  of  the  same  length, 
and  the  figures  may  be  superimposed  as  follows : 


Fig.  5. 


88 


Value  and  Price 


Surplus 
Utility 


Marginal 
Utility  and 
Value  in 
Industrial 
Society 


Different 
Goods 
Valued  by 
Different 
Classes 


The  "  surplus  utility  "  area,  A  B  D,  in  this  figure  represents 
the  pleasure  an  isolated  producer  derives  from  the  consump- 
tion of  the  fruits  of  his  toil  over  and  above  that  which  com- 
pensates him  for  his  sacrifices  in  production.  From  the  point 
of  view  of  economics,  the  existence  of  this  surplus  is  what 
makes  life  worth  living-, 

§  50.  The  valuations  of  a  Crusoe  are  necessarily  crude  and 
inaccurate  because  he  has  only  his  own  judgment  and  experi- 
ence to  rely  upon.  In  industrial  society  the  valuations  of  each 
individual  are  supplemented  and  corrected  by  the  valuations 
of  other  individuals.  Judgments  in  regard  to  the  importance 
or  marginal  utilities  of  differemt  goods  are  collective  or  social 
and  for  this  reason  are  more  precise  than  they  can  be  for  men 
in  isolation. 

The  simplest  case  of  social  valuation  is  presented  in  connec- 
tion with  a  commodity  like  wheat  flour,  which  serves  a  variety 
of  uses  in  every  household  and  the  want  for  which  on  the  part 
of  the  normal  family  is  quite  elastic.  According  to  the 
familiar  principle  of  diminishing  utility  each  family's  con- 
sumption of  wheat  flour  may  be  arranged  in  a  scale  in  which 
the  high  utilities  of  the  more  important  units  will  come  first 
and  the  low  utilities  of  the  less  important  units  last.  At  the 
very  end  will  stand  the  marginal  utility  of  the  least  important 
unit  consumed.  As  all  families  consume  mmierous  units  of 
wheat  flour,  and  as  this  consumption  is  carried  in  most  families 
not  to  the  point  of  satiety,  but  only  to  the  point  at  which  the 
sacrifice  involved  in  paying  for  additional  units  is  not  fully 
compensated  by  their  utilities,  all  families  value  a  unit  of  such 
flour  approximately  in  proportion  to  its  marginal  utility  to 
themselves.  In  this  case  all  consumers  contribute  something 
towards  the  determination  of  the  social  valuation  upon  which 
depends  the  relative  importance  of  a  unit  of  wheat  flour  in 
comparison  with  units  of  other  goods. 

Some  readers  may  be  inclined  to  question  the  correctness  of 
the  statement  that  few  families  carry  their  consumption  of 
such  a  common  article  as  wheat  flour  to  the  point  of  satiety. 
Certainly  in  the  choice  of  their  own  food  the  rich  do  not  hesi- 
tate, under  present  conditions,  to  use  all  the  wheat  flour  in 
various  forms  for  which  they  feel  the  slightest  desire.     It  is 


Different  Goods  Valued  by  Different  Classes  89 

in  their  purchases  for  their  servants,  if  anywhere,  that  their 
consumption  of  such  an  article  stops  short  of  the  point  of 
satiety.  In  the  case  of  an  even  cheaper  commodity,  Uke  salt, 
the  consumption  of  perhaps  the  majority  of  families  in  a 
modern  community  is  unquestionably  carried  to  the  point  of 
satiety.  Such  a  commodity  is  not  an  object  of  painstaking 
economy  to  the  well-to-do,  but  virtually  a  free  good.  Its  mar- 
ginal utility  to  the  average  family  is  a  negligible  quantity  be- 
cause it  is  consumed  as  a  matter  of  course  down  to  the  point 
of  satiety.  The  value  of  such  an  article  is  determined  by  its 
marginal  utility  not  to  the  well-to-do,  but  to  the  very  poor,  to 
whom  even  the  small  price  of  a  bag  of  salt  is  a  burden,  and  to 
those  who  use  it  in  connection  with  industrial  purposes 
{e  g.,  in  the  salt-fish  industry,  in  removing  ice  from  the  tracks 
of  street  railways,  etc.).  The  value  ascribed  to  it  in  these  con- 
nections determines  its  importance  in  comparison  with  other 
commodities.  In  the  same  class  as  salt  are  matches  and  the 
other  cheap  articles  which  are  consumed  daily  by  rich  and 
poor  alike.  Such  articles  are  no  longer  objects  of  economy  to 
the  well-to-do,  who  pay  for  them  what  market  conditions  re- 
quire and  would  continue  to  buy  the  same  quantities,  that  is, 
all  they  have  any  possible  use  for,  even  if  the  prices  they  had 
to  pay  were  doubled  or  trebled.  In  such  cases  values,  or  the 
comparative  importance  of  units  of  different  goods,  are  deter- 
mined by  the  marginal  utilities  of  single  units  of  such  goods, 
not  to  each  individual  consumer,  but  to  consumers  generally. 
Well-to-do  consumers  exert  no  influence  because  they  con- 
sume all  that  they  wish  without  reference  to  what  they  must 
pay  for  such  goods.  This  leaves  the  task  of  valuation  to  con- 
sumers who  are  less  well  off  and  to  others  who  use  the  articles 
as  materials  for  further  production. 

A  second   characteristic  of  valuations  in  industrial   society  Valuation 
rests  on  the  fact  that  most  goods  are  not  simple  utilities,  but  even  of  Sin 

L  It  r  -I-    •  A  •  f        ,       1  r  ,  ■  R^e  Goods 

bundles  oi  utilities.  A  suit  of  clothes,  for  example,  is  not  Complex 
merely  a  protection  from  cold  and  damp.  The  modern  man 
pays  for  this  utility  in  his  clothes,  but  he  pays  much  more  for 
the  comfort  and  elegance  of  the  fit,  the  social  distinction  at- 
taching to  the  fineness  of  the  goods,  etc.  Since  valuation  con- 
sists in  ascribing  importance  to  goods  in  proportion  to  their 


go  Value  and  Price 

marginal  utilities,  it  involves  as  many  separate  steps  as  there 
are  separate  utilities  in  the  goods  to  be  valued.  Social  valua- 
tion differs  from  that  of  a  Crusoe  in  that  these  separate  steps 
are  taken  by  different  classes  in  the  community.  In  the  case 
of  clothes  the  well-to-do  class  which  patronises  fashionable 
tailors  takes  the  warmth  and  comfort  of  its  garments  for 
granted.  These  utilities  are  required  also  by  the  less  pros- 
perous classes  in  the  ready-made  clothes  which  they  buy  and 
are  valued  in  this  connection,  or  even,  as  regards  warmth,  by 
the  still  poorer  classes  who  buy  second-hand  clothes.  The 
patrons  of  fashionable  tailors  give  their  thought  to  deciding 
as  to  the  marginal  utility  to  them  of  the  style  of  cut  and  dis- 
tinction of  finish.  Perhaps  the  best  illustration  of  this  point 
is  presented  in  the  valuation  of  watches  of  different  grades. 
Nearly  everyone  wants  one  fairly  accurate  pocket  timepiece 
and  few  have  use  for  more  than  one.  The  money  equivalent 
of  the  marginal  utility  of  this  primary  quality  in  a  watch  is 
very  great  to  the  well-to-do  classes,  and  if  the  value  of  this 
quality  were  fixed  by  them  it  would  be  represented  by  many 
dollars.  But  the  conditions  of  production  are  now  such  that 
fairly  good  timekeepers  are  brought  within  the  reach  of  all. 
The  marginal  utility  which  determines  the  value  of  this  quality 
is  therefore  that  to  people  in  very  moderate  circumstances. 
The  watches  of  the  well-to-do  have  in  addition  to  this  primary 
requisite,  durability,  beauty,  power  to  give  social  distinction  to 
their  owners,  extreme  accuracy  as  timekeepers,  etc.  It  is 
these  qualities  that  the  well-to-do  value  according  to  their  mar- 
ginal utilities  to  themselves  rather  than  the  primary  quality 
common  to  all  honest  watches.  The  value  of  a  watch  is 
the  sum  of  the  values  assigned  to  each  one  of  its  qualities  by 
the  classes  to  which  these  qualities  stand  as  marginal  utilities. 
As  a  timepiece  it  is  valued  by  the  people  who  can  just  afford 
to  have  a  timepiece,  as  a  durable  timepiece  it  is  valued  by  b 
higher  class  in  the  economic  scale,  as  a  durable  timepiece  en- 
cased in  silver  it  is  valued  by  those  just  able  to  have  silver 
watches,  as  a  gold-cased  watch  it  is  valued  by  people  in  still 
better  circumstances,  etc.  In  each  instance  the  value  ascribed 
to  the  quality  added  just  before  is  carried  over  to  make  a  part 
of  the  value  of  the  watch  to  which  still  another  quality  has 


Valuation  a  Social  Process  91 

been  added.  The  value  assigned  to  this  last  quality  is  added  to 
the  values  previously  determined  to  make  the  value  of  the 
whole  watch.  Thus  the  value  of  any  good  which  is  made  up 
of  a  bundle  of  qualities  is  the  result  of  a  social  rather  than  of 
an  individual  calculation  of  marginal  utilities. 

The  three  illustrations  that  have  been  given  are  typical  of  Valuation 
the  valuations  that  are  made  in  industrial  society.  Use  value  ^,^'^^^^1 
is  still  man's  estimate  of  marginal  utility.  Not  every  man's 
estimate,  however,  determines  it,  because  in  industrial  society 
the  valuations  of  individuals  are  influenced  by  those  of  other 
individuals  with  whom  they  come  in  contact.  The  value  of 
each  good  depends  upon  its  marginal  utility  to  the  group  of 
consumers  to  whom  it  is  an  object  of  economy.  If  it  is  com- 
posite its  value  is  the  sum  of  the  marginal  utilities  of  its  dif- 
ferent qualities  to  the  groups  to  which  these  qualities  are 
objects  of  economy.  Value  in  industrial  society  is  thus  the 
result  of  social  valuation.  It  is  not  so  much  man's  estimate, 
as  society's  estimate  of  marginal  utility. 

§  51.  In  the  economic  calculations  of  a  Crusoe,  as  we  have  Marginal 

seen,  marginal  disutilitv  serves  quite  as   readily  as  marginal  ^°^}  ^^^ 

■  ^  ^  ft.  Value  m 

utuity  as  a  gauge  of  the  value  of  reproducible  goods.  Dis-  Industrial 
iitility  or  cost  of  production  includes  all  of  the  painful  and  dis-  So^'^^y 
agreeable  sensations  that  men  experience  in  connection  with 
production.  Each  such  sensation  stands  for  a  sacrifice  and 
unless  the  results  of  production  fully  compensate  all  those  who 
have  made  sacrifices  it  has  entailed  loss  in  well-being.  So 
long  as  attention  is  confined  to  the  production  of  a  Crusoe  the 
painfulness  of  prolonged  efifort  may  stand  by  itself  for  these 
sacrifices,  but  for  industrial  society  with  its  subdivision  of 
functions  a  more  precise  analysis  is  necessary.  In  addition  to 
the  painfulness  of  efifort  is  another  sacrifice  which  we  may 
describe  as  postponing  consumption  or  waiting.  This  is  in- 
volved more  or  less  in  all  branches  of  production.  The  work- 
man who  labours  only  eight  hours  a  day  may  not  prolong  his 
effort  to  a  point  where  it  is  painful,  but  he  is  sure  before  the 
day  is  over  to  feel  that  he  is  making  a  great  sacrifice  in  con- 
tinuing at  his  bench  when  he  might  be  out  in  the  street  or  at 
home  with  his  family.  Postponing  consumption  even  until 
the  whistle  blows  is  one  of  his  costs  of  production.     But  under 


92  Value  and  Price 


present  conditions  the  postponement  required  is  much  longer 
than  this.  Modern  production  is  indirect  or  roundabout. 
Materials,  tools,  machines,  etc.,  are  produced  as  aids  to  the 
production  of  consumable  goods,  and  on  the  average  a  long 
period  of  waiting  must  intervene  between  the  first  steps  in  pro- 
duction and  its  issue  in  goods  which  are  ready  for  consump- 
tion. The  postponement  of  consumption  which  this  entails  is 
little  appreciated  by  workmen.  They  experience  the  painful- 
ness  of  effort  and  they  must  perforce  abstain  from  consump- 
tion during  their  working  hours,  but  the  conditions  of  their 
employment,  as  a  rule,  insure  them  their  wages  by  the  week  or 
the  month  irrespective  of  the  stage  of  completion  of  the  goods 
which  they  help  to  produce ;  and  the  conditions  of  their  lives, 
as  a  rule,  cause  them  to  spend  these  wages  for  consumable 
goods  as  soon  or  nearly  as  soon  as  they  earn  them.  Postpon- 
ing consumption  so  that  production  may  be  carried  on  in  a 
roundabout  way  is  the  function  of  capitalists.  It  is  their 
wealth  which  is  tied  up  in  the  form  of  the  tools,  machines^ 
buildings,  etc.,  indispensable  to  efficient  production,  and  the 
sacrifices  v.'hich  they  make  in  permitting  their  incomes  to  take 
these  forms  rather  than  the  form  of  consumable  goods  which 
the)'  could  immediately  enjoy  are  as  properly  included  in  the 
costs  of  production  as  the  sacrifices  of  workmen. 
Complica-  Nor  is  the  division  of  the  sacrifices  connected  with  produc- 

Calculation  tion  between  workmen  and  capitalists  the  only  complication  to 
of  Social  i)Q  considered  in  an  analysis  of  costs.  Production  is  co- 
operative and  many  men  unite  their  efforts  to  effect  the  crea- 
tion of  even  the  simplest  good.  It  follows  that  the  cost  of 
production  of  each  good  is  a  sum  of  sacrifices  to  which  many 
different  individuals  have  contributed.  Workmen  of  different 
grades  and  different  capitalists,  each  contributing  only  a  part 
of  the  capital  used,  have  a  share  in  it.  Moreover,  since  cost  is 
at  bottom  a  question  of  individual  feeling,  its  amount  depends 
quite  as  much  on  the  character  and  circumstances  of  the  pro- 
ducer as  upon  the  productive  act  which  he  performs.  As  a 
rule  those  doing  the  same  sort  of  work  are  sufficiently  alike  to 
make  general  statements  in  regard  to  the  cost  of  that  work 
admissible,  but  there  are  many  productive  services  which  are 
rendered  by  individuals  belonging  to  quite  different  classes 


Cost 


Complications  in  Calculation  of  Social  Cost    93 

and  whose  costs  are  accordingly  quite  different.  The  most 
common  causes  of  differences  in  costs  are  differences  in 
weahh.  Every  increase  in  income  brings  with  it  the  pos- 
sibiHty  of  increased  enjoyment  from  consumption.  The  man 
who  has  only  what  he  earns  from  day  to  day  and  who 
earns  only  enough  to  supply  him  with  the  requisites  to 
decent  living  has  little  to  tempt  him  from  his  work.  If  his 
daily  round  of  tasks  is  painless  it  involves  a  minimum  of 
sacrifice,  as  he  has  little  to  turn  to  outside  of  the  factory. 
Give  the  same  man  an  income  from  investments  equal  to 
what  he  earns  by  his  work  and  the  sacrifice  involved  in  that 
work  is  increased.  Increase  his  income  from  investments 
until  he  has  enough  to  live  on  luxuriously  without  work- 
ing at  all,  and  he  is  more  likely  than  not  to  find  the  labour, 
which  before  was  not  felt  to  be  a  burden,  so  irksome  and  un- 
pleasant that  he  will  give  it  up  entirely.  The  character  of  the 
work  has  not  changed,  but  the  circumstances  of  the  man  have, 
and  as  a  result  there  is  a  multiplication  of  cost.  In  the  higher 
grades  of  employment  where  men  with  independent  means 
work  at  the  same  tasks  wath  men  who  have  no  other  sources 
of  income,  differences  in  costs  are  so  common  as  to  make 
general  statements  about  costs  hazardous.  The  most  impor- 
tant instance  of  such  differences  is  in  connection  with  the 
service  of  postponing  consumption,  or  waiting,  rendered  by  the 
capitalist  class.  This  class  is  composed  of  all  sorts  and  condi- 
tions of  men  from  millionaires  to  dollar-a-day  labourers. 
Society  values  the  services  they  render  by  reference  not  to  the 
sacrifices  that  are  involved  for  them  individually  in  the  accumu- 
lation of  capital,  but  to  the  amount  of  capital  they  accumulate. 
The  wage-earner's  meagre  savings  assist  production  no  more 
and  are  no  more  important  dollar  for  dollar  than  the  inherited 
millions  of  the  idle  rich.  Where  the  same  productive  services 
involve  different  degrees  of  sacrifice  for  different  producers,  it 
is  the  sacrifice  to  marginal  producers,  or  those  whose  sacrifice 
is  greatest,  that  must  be  counted  in  the  cost  of  production. 
This  must  be  compensated  by  the  utility  of  the  product  or  it 
will  not  be  incurred  any  more  than  will  an  uncompensated 
last  hour's  labour  be  performed  by  an  isolated  producer.  The 
calculation  of  the  cost  of  production  in  industrial  society  is 


94 


Value  and  Price 


Valuation 
of  Comple- 
mentary 
Goods 


thus  a  very  complex  process,  and  any  balancing  of  marginal 
cost  or  disutility  against  marginal  utility  must  be  roundabout 
and  difficult  of  analysis. 

The  above  discussion  of  the  relation  between  cost  and  value 
in  industrial  society  is  intended  rather  to  suggest  than  to  solve 
difficulties.  It  touches  upon  some  of  the  most  intricate  prob- 
lems of  advanced  economics  and  cannot  be  pursued  further 
w^ithout  the  fuller  knowledge  of  industrial  relations  which  the 
following  chapters  attempt  to  supply.  On  the  basis  of  this 
knowledge  the  topic  is  taken  up  again  in  Chapter  XVI.  and 
some  conclusions  are  suggested  which,  it  is  hoped,  may  en- 
courage a  more  profound  study  of  the  subject. 

§  52.  A  special  case  of  valuation  of  the  greatest  importance 
is  that  of  complementary  goods.  Many  wants  are  satisfied  not 
by  one  good  but  by  a  complementary  group  of  goods,  the  ab- 
sence of  any  element  in  wdiich  would  be  fatal  to  the  result. 
In  such  a  case  the  whole  group  is  valued  as  a  unit  in  accord- 
ance with  the  principles  just  explained;  and  the  valuation  of 
each  good  in  the  group  is  the  result  of  a  separate  calcula- 
tion. 

An  illustration  is  furnished  by  Crusoe's  gun  and  cartridges. 
Without  the  cartridges  the  gun  is  valueless,  without  the  gun 
the  cartridges  are  of  no  use.  In  this  case  if  Crusoe  wishes  to 
put  a  value  on  either  he  must  ascribe  to  it  all  of  the  impor- 
tance that  belongs  to  both.  In  industrial  society  comple- 
mentary goods  have,  as  a  rule,  independent  uses  to  which  they 
may  be  applied.  In  the  case  of  a  gun  and  cartridges,  the 
latter,  at  least,  or  their  component  parts,  may  be  turned  to 
other  purposes.  This  opportunity  for  independent  use  "fur- 
nishes grounds  for  independent  valuation  and  makes  it  pos- 
sible to  calculate  by  a  process  of  subtraction  the  value  of  the 
good  which  is  useful  only  in  the  complementary  group.  The 
value  of  the  whole  group  is  measured  by  its  marginal  utility. 
The  values  of  the  elements  in  the  group  which  serve  other  pur- 
poses are  determined  by  their  marginal  utilities  in  these  inde- 
pendent uses.  The  dift"erence  between  the  value  of  the  whole 
group  and  the  sum  of  these  independent  values  is  properly  as- 
cribed to  the  element  or  elements  which  are  of  use  only  in  the 
group.     If  the  group   is  made   up   of  several   elements,  the 


Valuation  of  Complementary  Goods      95 

process  of  valuation  may  be  exceedingly  complex  in  practice, 
but  the  considerations  involved  are  readily  understood. 

The  most  familiar  complementary  groups  that  men  have  Factors  in 
occasion  to  value  are  those  made  up  of  producers'  goods.  As  are  Comple 
production  is  now  carried  on  every  step  in  the  productive  mentary 
process  involves  the  co-operation  of  several  complementary  ^^  ^ 
factors.  The  value  of  each  group  of  factors  is  derived  from 
that  of  the  consumable  goods  which  it  is  helping  to  produce. 
The  latter  satisfy  wants  directly  and  may  be  valued  by  refer- 
ence to  the  intensities  of  these  wants.  Groups  of  producers' 
goods  do  not  satisfy  wants  directly  and  owe  the  importance  or 
value  ascribed  to  them  to  the  part  they  play  in  the  production 
of  consumable  goods.  Although  a  derived  value,  the  valua- 
tion of  complementary  groups  of  producers'  goods  obeys  the 
same  principles  that  apply  to  groups  of  consumable  goods. 
The  value  of  the  whole  group  is  calculated  by  reference  to  the 
value  of  the  consumable  goods  to  result  from  it.  The  values 
of  different  elements  in  the  group  are  determined  as  far  as 
possible  by  reference  to  the  independent  uses  to  which  they 
may  be  put.  The  value  of  the  whole  less  the  values  assigned 
independently  to  the  elements  for  which  there  are  other  uses 
is  the  value  to  be  ascribed  to  the  element  or  elements  that  have 
no  independent  uses.  In  practice  these  calculations  are  often 
very  complex  and  could  hardly  be  made  at  all  but  for  the  inter- 
mediation of  money,  the  common  medium  in  which  they  are 
all  expressed  by  the  business  community. 

§53.  As  already  explained.^ the  calculations  in  reference  to  Values  in 
marginal  utilities  upon  which  values  in  use  depend  are  com-  y  ?  ^■ 
parative    rather   than    absolute.      They    attain    precision    only  Exchange 
when  there  are  a  number  of  different  goods  to  be  valued  and 
the  consumer  is  given  a  choice  between  additional  units  of  one 
or  the  other  of  them.     In  such  cases  marginal  utilities  must  be 
carefully  balanced  against  each  other  if  an  unwise  selection  is 
to  be  avoided.     The  typical  consumer  of  industrial  society  is 
an  individual  with  numerous  and  varied  wants  having  access 
to  markets  in  which  numerous  and  varied  goods  capable  of 
satisfying  these  wants  arc  ofifered  for  sale,  but  limited  in  his 
means  so  that  many  of  his  wants  must  go  unsatisfied.     Suc- 
cessive units  of  each  particular  good  offered  for  sale  obey  the 


96 


Value  and  Price 


Values  in 
Exchange 
Expressed 
as  Prices 


Exchange 
Values  • 
Cannot 
Increase  or 
Decrease  as 
a  whole 


law  of  diminishing  utility.  In  order  to  get  the  largest  return 
from  the  expenditure  of  his  limited  means  the  consumer  must 
consider  the  law  of  variety.  He  must  not  buy  an  additional 
unit  of  one  good  when  a  unit  of  some  other  good  which  may 
be  had  at  the  same  price  has  greater  utility.  In  general  he 
should  carry  his  purchases  of  units  of  different  goods  which 
he  desires  down  to  the  point  at  which  the  returns  in  utility  for 
his  last  units  of  expenditure  are  approximately  the  same  all 
along  the  line.  Only  under  these  conditions  is  he  getting  the 
largest  possible  return  in  utility  for  his  expenditures.  Econo- 
mists sometimes  speak  of  the  marginal  utilities  of  all  of  the 
goods  which  a  person  consumes  as  determining  the  location  of 
his  margin  of  consumption.  This  margin  should  be  as  even 
as  possible  to  insure  the  maximum  return  in  satisfaction  to  the 
consumer  with  limited  means. 

The  balancing  against  each  other  of  the  marginal  utilities 
of  different  goods  is  one  of  the  chief  factors  which  deter- 
mine the  ratios  at  which  such  goods  exchange  for  each  other, 
or  exchange  values.  The  practice  of  exchanging  goods  for 
money  is  now  so  universal  that  exchange  values  are  habitually 
written  with  a  sum  of  money  as  an  intermediate  term.  Busi- 
ness men  do  not  compare  commodities  by  saying  that  so  much 
of  one  exchanges  for  so  much  of  the  other,  but  by  noting  their 
prices.  They  do  not  say,  for  example,  that  a  bushel  of  wheat 
is  the  equivalent  of  two  bushels  of  corn,  but  that  the  price  of 
wheat  is  one  dollar  a  bushel  and  of  corn  fifty  cents.  In  con- 
formity  with  this  practice  the  discussion  of  the  circumstances 
determining  exchange  values  which  follows  is  couched  in 
terms  of  prices. 

The  first  principle  in  reference  to  exchange  values  that  must 
be  emphasised  is  that  as  ratios  they  can  neither  rise  nor  fall  as 
a  whole.  Values  in  use,  determined  as  they  are  by  marginal 
utilities,  may  increase,  but  values  in  exchange  cannot.  A 
change  in  the  exchange  value  of  a  particular  good  always  and 
necessarily  involves  complementary  changes  in  the  exchange 
values  of  other  goods.  For  example,  if  the  exchange  value  of 
a  bushel  of  wheat  increases  from  x  to  2.v,  the  exchange  value 
of  X  has  diminished  from  one  bushel  of  wheat  to  one-half  a 
bushel  of  wheat.     Exchange  values  as  a  whole  cannot  be  said 


The  Value  of  Money  97 

to  have  changed  at  all.  It  is  equally  important  to  note  that 
the  exchange  vakie  of  money,  in  which  prices  are  expressed, 
may  increase  or  decrease  hke  the  exchange  value  of  any  other 
individual  good.  When  the  exchange  value  of  money  in- 
creases prices  fall,  when  it  decreases  prices  rise.  As  prices  arc 
the  barometer  which  guides  business  men  in  all  their  transac- 
tions it  is  of  the  greatest  importance  that  that  commodity 
should  be  selected  to  serve  as  money  which  is  least  likely  to 
tiuctuate  in  its  exchange  value. 

§  =;4.  The  value  of  a  unit  of  monev  or  of  a  dollar,  like  the_The  Value 

—      -----        -  q£  j^ionev 

value  of  anything  else,  is  man's  estimate  of  its  marginal  utility. 

This  is  identical  with  the  marginal  utilities  of  the  goods  a  dol- 
lar will  buy.  Each  man  has  a  certain  money  income  to  ex- 
pend and  a  certain  scale  of  wants  to  satisfy.  His  efifort  is  to 
get  the  largest  possible  return  for  his  outlay.  To  accomplish 
this  he  must  consider  the  prices  of  things  quite  as  much  as 
their  utilities.  His  first  dollar  should  go  for  that  combina- 
tion of  goods  having  the  greatest  utility,  his  second  for  a  some-  . 
what  less  needed  combination,  and  so  on,  each  dollar  adding 
somewhat  less  to  his  store  of  utilities  than  its  predecessor. 
The  marginal  utilities  of  the  goods  purchased  with  his  last 
available  dollar  measure  the  value  of  a  dollar.  It  is  these 
goods  that  the  additional  dollar  adds  to  his  store ;  take  the  dol- 
lar away  and  it  is  these  goods  that  he  will  forego.  They 
measure  the  importance  or  value  of  a  single  dollar  in  his  scale 
of  living. 

Few  people,  even  among  those  who  regularly  spend  their  Influences 
entire  incomes  in  the  satisfaction  of  their  wants,  estimate  the  '-^nectinglt 
value  of  a  dollar  as  rigidly  as  the  above  analysis  implies,  and 
yet  everyone  has  as  a  result  of  his  business  experience  a  pretty 
accurate  notion  of  the  value  of  the  monetary  unit.  If  parents 
sometimes  complain  that  their  children  are  without  such  a 
conception,  it  is  a  proof  simply  that  conditions  have  changed 
since  they  were  young  and  that  the  value  of  a  dollar  to  their 
children  is  actually  less  than  to  themselves.  In  the  minds  of 
educated  men  the  value  of  a  dollar  includes  not  merely  the 
utilities  of  consumable  goods,  but  leisure  for  enjoyment,  social 
esteem  and  influence,  the  perpetuation  of  the  family  name  and 
family  traditions,  everything,  in  short,  which  command  over 


98 


Value  and  Price 


The  Deter- 
mination of 
Prices 


Buyers' 
Calcula- 
tions 


dollars  may  secure  and  which  seems  to  them  desirable.  It  is 
probably  true  also  that  some  people  worship  dollars  in  a  quite 
irrational  way  for  their  own  sake,  though  misers  who  have 
no  ulterior  motive  beyond  hoarding  up  money  are  more  com- 
mon in  fiction  than  in  real  life. 

For  convenience  of  analysis  it  will  be  assumed  in  the  fol- 
lowing chapters  that  the  exchange  value  of  money,  that  is,  the 
quantity  of  commodities  generally  which  it  can  command  in 
the  markets  of  the.  country,  is  invariable.  This  is  not  quite 
true  in  practice,  as  is  fully  explained  in  Chapter  XIX.,  but  it 
is  so  nearly  true  over  short  periods  of  time  that  no  serious 
error  is  involved  in  the  assumption. 

§  55.  The  circumstances  that  at  last  analysis  determine  the 
money  prices  of  goods  and  services  are  exceedingly  complex. 
To  understand  them  it  is  necessary  to  comprehend  every  phe- 
nomenon of  economic  life.  Nevertheless  the  actual  process 
by  which  money  prices  are  fixed  is  comparatively  simple. 
Buyers  and  sellers  come  together  each  with  definite  notions  as 
to  what  the  prices  should  be,  and  the  prices  finally  fixed  are 
the  result  of  their  bargaining. 

On  the  side  of  buyers  the  following  calculations  are  com- 
monly made :  ( i )  They  decide  in  regard  to  the  values  in  use 
of  the  dififerent  goods  offered  for  sale,  and  if  they  think  of  get- 
ting more  than  a  single  unit  of  each  good  they  consider  the 
values  of  additional  units.  In  this  connection,  as  already  ex- 
plained, marginal  utilities  are  decisive.  (2)  They  decide  as 
to  the  prices  that  they  are  willing  to  pay.  As  regards  most 
of  the  goods  purchased  there  is  no  hesitation.  Experience  has 
taught  that  at  the  prices  at  which  they  may  ordinarily  be  pur- 
chased they  afford  the  greatest  return  in  satisfaction  to  be  de- 
rived from  the  expenditure  necessary  to  such  purchase.  Thus 
the  normal  family  purchases  flour,  sugar,  and  the  other  staples, 
that  enter  into  the  consumption  of  every  household  as  a  matter 
of  course.  Deliberation  begins  only  after  these  necessaries  are 
secured,  and  the  question  is  how  to  get  the  largest  return  for 
the  sum  that  remains  to  be  expended.  Buyers  vary  greatly  in 
the  intelligence  they  show  in  disposing  of  their  surplus  in- 
comes. Some  expend  them  regularly  for  goods  which  they 
do  not  really  want,  but  which  attract  by  their  novelty.     Less 


Four  Possible  Cases  99 

impulsive  buyers  have  in  mind  several  different  goods  which 
they  would  like  to  have.  These  are  arranged  in  their  minds 
in  a  rough  scale  which  enables  them  to  decide  promptly  which 
of  two  goods  they  would  prefer  at  the  same  price,  or  whether 
at  different  prices  the  dearer  good  is  worth,  in  their  scale  of 
consumption,  the  difference.  In  all  of  these  calculations  the 
value  they  ascribe  to  the  monetary  unit  is  quite  as  important 
in  directing  their  purchases  as  the  values  they  ascribe  to  the 
goods  bought. 

The  calculations  of  sellers  are  usually  somewhat  more  accu-  Sellers'Cal- 
rate  than  those  of  buyers,  (i)  They  know  pretty  closely  how  '^"^^^^''^^ 
much  the  goods  they  have  to  sell  have  cost  them  in  money. 
This  we  will  refer  to  in  future  as  the  expense  of  production. 
Since  they  are  in  business  for  profit,  sellers  look  upon  the  ex- 
pense of  producing  a  unit  of  commodity  as  a  minimum  price, 
less  than  which  they  cannot  afford  to  take  except  under 
unusual  circumstances.  (2)  They  have  accurate  information 
in  regard  to  the  current  prices  of  goods  and  on  the  basis  of 
this  knowledge  decide  what  prices  they  ought  to  obtain.  At 
this  point  sellers  are  influenced  by  standards  made  for  them 
by  market  and  other  social  conditions,  just  as  buyers  are  in- 
fluenced to  a  certain  extent  by  the  standards  of  others  in  cal- 
culating the  values  in  use  of  different  goods. 

There    are    four   possible    situations    in    which    buyers    and  Four 

sellers  may  come  together.     The  simplest  is  that  in  which  one  Cases  • 

buyer  bargains  with  one  seller  to  secure  a  commodity  which  0"^  Buyer 

that  seller  alone  offers  for  sale.     The  buyer  has  made  up  his  Seller 

mind  what  price  he  will  pay  rather  than  not  get  the  commodity, 

but  as  an  economic  man  he  wishes  to  pay  as  much  less  as  is 

consistent  with  his  sense  of  fair  dealing.     On  the  seller's  side 

is  a  definite  idea  of  the  lowest  price  he  can  afford  to  accept,  but 

his  business  interest  calls  for  the  highest  price  he  can  get. 

If  the  buyer's  maximum  price  does  not  exceed  the  seller's 

minimum  price  it  is  obvious  that  no  exchange  can  take  place. 

If  it  does,  then  the  market  price  must  lie  somewhere  between 

these  limits.     Just  where  depends  upon  the  relative  skill  of  the 

two  parties  in  bargaining. 

A  second  and  more  common  situation  is  that  in  which  sev-  Seveial 

,  •         •  1  11  ,      ,  ,        r    ,       Ruversand 

eral  buvers  bargam  with  one  seller  who  has  a  monopolv  of  the  One  Seller 


loo  Value  and  Price 

good  which  all  the  buyers  want.     This  situation  admits  of  a 
variety  of  accompanying  circumstances :   ( i )   The  monopolist 
seller  may  have  only  one  unit  of  the  desired  good,  as  is  often 
the  case  with  dealers  in  antiques.     In  such  a  case  the  buyer 
who  is  prepared  to  pay  the  highest  price  will  get  the  coveted 
object  at  a  price  between  that  offered  by  the  next  highest 
bidder  and  his  own  maximum  price  unless,  indeed,  the  latter 
is  less  than  the  dealer  is  willing  to  accept.     How  this  works 
out  in   practice   is   so   frequently   illustrated   at   auctions   that 
there  is  no  need  to  enlarge  upon  it.     (2)  The  monopolist  seller 
may  have  several  units  of  the  desired  good  and  these  may  be 
incapable  of  reproduction.     In  this  case  he  may  pursue  the 
plan  of  getting  as  much  as  he  can  for  each  unit  as  it  is  sold, 
as  is  usual  at  auctions,  or  of  marking  each  with  the  highest 
price    which    he   thinks    he    can   get    for   all    of   them,    as    is 
usual   with   "  one-price  "   dealers  in  antiques.     If  he  pursues 
the  first  course  the  result  will  be  similar  to  that  in  the  first  case. 
Each  successive  unit  will  go  to  the  competitor  who  was  just 
outbid  by  the  more  eager  buyer  who  got  the  one  before.     In 
this  case  the  prices  received  for  different  units  will  vary  widely 
and  if  all  are  sold  at  one  time  will  show  a  tendency  to  decline. 
If  the  seller  pursues  the  latter  course  and  uses  good  judgment 
in  marking  his  wares  he  will  fix  on  the  price  wdiich  is  just 
equal  to  the  maximum  which  the  buyer   whose  purchase  is 
necessary  to  the  sale  of  the  entire  supply  is  willing  to  pay.  un- 
less, of  course,  this  is  below  the  price  which  he  is  himself  willing 
to  accept,  when  some  of  the  supply  must  remain  on  his  hands. 
(3)    The    monopolist    seller   may    have    several    units    of   the 
desired  good  and  may  be  in  a  position  to  produce  as  many  more 
units  as   he   considers   it  profitable  to  put  upon  the  market. 
This  is  the  common  case  of  monopoly  and  is  so  important  that 
special  chapters  are  devoted  to  it.     At  this  point  it  will  suffice 
to  submit  the  fairly  obvious  propositions  that  anywhere  be- 
low the  limit  fixed  by  the  maximum  price  which  the  most 
eager  buyer  is  willing  to  pay,  the  monopolist  may  fix  the  price 
by  regulating  the  supply,  and  that,  in  so  regulating  the  supply, 
he  will  try  to  fix  the  price  that  will  aft'ord  him  the  largest 
monopoly  profit  over  and  above  his  expenses  of  production. 
A  third  situation  is  presented  when  one  buyer  bargains  with 


Two-sided  Competition  loi 

several  competing  sellers.     Perhaps  the  most  common  case  of  One  Buyer 

this  kind  is  when  a  single  city  family  goes  in  the  summer  to  sellers 

live  in  a  country  district  where  all  other  families  produce  for 

themselves  all  of  the  milk,  butter,  eggs,  chickens,  etc.,  which 

they    require.     Under    such    circumstances,    if   competition    is 

permitted  to  work  out  its  full  effects,  the  new  family  may  get 

the  country  products  it  requires  for  the  lowest  prices  the  most 

eager  sellers  competent  to  supply  all  its  needs  are  willing  to 

accept.     More  frequently  comjjetition  is  restrained  by  custom 

and  the  buyer  has  a  choice  between  goods  of  different  quality 

rather  than  between  different  prices  for  the  same  goods.     This 

third  case  of  '*  buyers'  monopoly  "  has  resulted  at  times  from 

the    formation    of    the    trusts    discussed    in    Chapter    XXV. 

When  all  of  the  manufacturers  who  use  a  particular  kind  of 

raw  material  combine,  producers  of  the  raw  material  are  placed 

at  a  great  disadvantage  in  bargaining.     They  may  be  forced 

to  accept  a  price  which  is  so  low  as  to  drive  all  but  the  most 

capable  of  them  out  of  business. 

§  56.  The  last  and  most  common  situation  is  that  in  which  Two-sided 
there  are  several  buyers  and  several  sellers,  between  whom  more  ^j^q  ^^  ^* 
or  less  active  competition  and  bargaining  are  carried  on.  In 
highly  organised  industrial  centres  this  competition  shows 
itself  more  clearly  on  the  side  of  sellers  than  upon  that  of 
buyers,  and  in  fact  in  most  branches  of  trade  sellers  have 
adopted  the  plan  of  marking  prices,  leaving  it  to  buyers  to  ac- 
cept them  or  reject  them  as  they  see  fit.  This  arrangement 
does  not  dispense  with  buyers'  competition  as  an  active  force 
in  the  determination  of  prices,  since  this  is  one  of  the  chief 
factors  that  sellers  consider  in  deciding  what  they  shall  ask 
for  their  wares,  but  it  makes  the  whole  process  more 
complicated. 

In  order  to  bring  out  the  various  influences  at  work  under  An 
conditions  of  two-sided  competition,  we  will  examine  the  case  ^^^ration 
of  an  auction  sale  in  w^hich  an  auctioneer  has  identical  goods, 
bicycles  we  will  say,  belonging  to  different  sellers  and  is  in- 
structed to  sell  as  many  of  them  as  he  can  at  the  highest  price 
he  can  get,  each  seller  naming  the  minimum  price  which  he  is 
willing  to  accept  for  his  wheel.  Assume  that  there  are  six 
wheels  and  that  the  sellers'  minimum  prices  are  $20,  ^22,  $24, 


102  Value  and  Price 

$25,  %2y,  and  $30,  respectively.  Among  the  many  would-be 
buyers  at  the  auction  the  six  who  are  prepared  to  pay  the 
highest  prices  for  wheels  have  in  mind  as  their  maximum 
prices  $40,  $35,  %t^2,  $30,  $28,  and  $25,  respectively.  Each 
buyer  understands  the  conditions  of  the  sale  and,  as  one  wheel 
is  like  another  to  him,  will  be  inclined  to  hold  back  in  his  bid- 
ding with  a  view  to  buying  at  a  low  price.  All  six  of  them 
are  willing  to  pay  $25,  but  at  this  price  only  four  of  the  wheels 
can  be  purchased,  and  fear  of  not  getting  any  wheel  at  all  will 
lead  one  of  them  to  bid  $26.  At  this  price  five  would  be  will- 
ing to  buy,  but  only  four  wheels  are  salable.  One  buyer  must 
bid  more  or  lose  his  chance  to  buy,  so  '$2y  will  be  offered.  At 
this  price  five  wheels  may  be  sold  to  the  five  buyers  willing  to 
take  them,  but  if  the  auctioneer  is  properly  mindful  of  the 
interests  of  his  customers  he  will  try  to  get  still  more.  If  he 
succeeds  in  forcing  the  bid  up  to  $28  there  will  still  be  five 
buyers  for  the  five  wheels  he  is  authorised  to  sell.  Any  price 
between  $27  and  $28  will  effect  the  sale  of  his  five  wheels,  and 
since  the  sixth  buyer  will  pay  only  $25,  while  the  sixth  seller 
will  not  take  less  than  $30,  only  five  wheels  can  change  hands 
under  the  given  conditions.  The  price  between  $27  and  $28 
is  therefore  the  one  most  satisfactory  to  buyers  and  sellers  as 
a  whole,  and  the  one  which  competition,  restrained  by  the 
self-interest  of  competitors,  tends  to  establish. 

The  Actual        Artificial  though  the  above  illustration  is,  it  comes  close  to 
1;  ractice  .  ... 

representing   the   forces   which   determine   competitive   prices 

generally.  Rival  sellers  do  not  entrust  their  goods  to  an 
auctioneer,  but  they  act  jointly  very  much  as  he  acted  in  the 
assumed  case.  Each  has  a  minimum  price  determined  by  his 
expenses  of  production.  All  wish  the  largest  number  of  sales 
at  the  highest  attainable  price.  Their  tendency  as  individuals 
is  to  put  up  the  price.  As  competitors  they  tend  to  lower  it 
to  enlarge  the  volume  of  their  sales.  If  competition  is  active 
between  a  number  of  sellers  with  varying  expenses  of  produc- 
tion, the  price  is  likely  to  be  fixed  at  a  point  which  aiTords 
profits  to  several,  just  pays  the  expenses  of  production  of 
others,  and  drives  others  out  of  business  because  it  does  not 
cover  their  expenses  of  production.  The  part  which  buyers 
play  in  bringing  about  this  result  is  to  seek  constantly  for 


The  One-price  System  103 

the  cheapest  market.  Their  competition  is  rarely  actually 
excited,  as  was  assumed  at  the  bicycle  auction,  but  its  poten- 
tial force  is  indicated  to  sellers  by  the  rapidity  with  which 
their  goods  are  sold  at  the  prices  which  they  fix.  The  more 
attentive  buyers  are  to  their  interests  in  getting  goods  at  the 
lowest  prices,  the  more  likely  are  sellers  to  meet  price-reduc- 
tions promptly,  so  that  there  will  be  substantially  one  price  for 
each  particular  good  at  any  one  time  throughout  the  whole 
market.  The  price  will  be  lower  than  many  buyers  stood  will- 
ing to  pay,  it  will  just  about  suit  the  ideas  of  others,  while  still 
others  will  find  it  too  high. 

In  assuming  that  two-sided  competition  will  tend  to  estab-  The 
lish  one  uniform  price  instead  of  a  variety  of  prices  for  identi-  Svstem'^^ 
cal  units  of  the  goods  sold,  w^e  are  simply  stating  a  fact  of 
common  observation  in  highly  organised  markets.  Experi- 
ence has  taught  both  buyers  and  sellers  the  advantage  of  agree- 
ing upon  the  one  price  at  which  a  maximum  number  of  sales 
may  be  effected,  and  all  the  machinery  of  competition,  pub- 
lished price  lists,  clearly  marked  prices  on  goods  offered  for 
sale,  etc.,  is  designed  to  bring  this  about.  Only  in  communi- 
ties in  a  backward  condition  industrially,  as  in  Italy  for 
example,  do  any  large  number  of  sellers  at  retail  continue  to 
make  the  determination  of  the  price  at  which  each  good  shall 
be  sold  a  matter  for  a  special  bargain.  The  time  that  is  wasted 
in  consequence  in  useless  higgling  is  convincing  proof  of  the 
superiority  of  the  one-price  system.  In  the  wholesale  trade 
special  bargains  between  the  wholesale  dealer  and  his  influen- 
tial customers  are  more  common  and  skill  in  bargaining  is  an 
important  requisite  to  success.  The  price  limits  within  which 
such  bargaining  is  confined  are,  however,  narrow,  and  the 
wholesaler  is  always  restrained  from  making  too  great  conces- 
sions by  the  fear  that  he  may  alienate  his  other  customers. 

Generalising  on  what  has  been  said,  we  may  conclude  that 
two-sided  competition  and  bargaining  between  buyers  and 
sellers  tend  to  establish  one  price  or  a  narrow  range  of  prices 
for  each  good  and  that  this  corresponds  to  the  money  equiva- 
lent of  the  marginal  utility  of  the  good  to  the  buyer  who  is  just 
induced  to  buy  and  to  the  expense  of  production  of  the  seller 
whose  supply  is  necessary  along  with  the  supplies  of  sellers 


I04 


Value  and  Price 


Market 
Prices 


Normal 
Prices 


bummary 


who    produce    more    cheaply    to  satisfy    the    demand    of   the 
market. 

§  57.  A  study  of  the  four  possible  modes  of  price  formation 
indicates  that  the  money  equivalents  of  the  marginal  utilities 
of  the  goods  offered  for  sale  to  those  whom  we  may  style  the 
marginal  buyers,  that  is,  buyers  who  are  just  induced  to  buy, 
always  have  an  important  influence  upon  prices.  In  case  there 
is  only  a  limited  number  of  units  of  the  good  in  existence  or 
its  production  is  controlled  by  a  monopoly,  these  marginal  utili- 
ties, which  are  themselves  influenced  by  the  number  of  units 
offered  for  sale,  or  by  supply,  determine  the  price.  In  the  case 
of  freely  reproducible  goods  the  money  equivalents  of  their 
marginal  utilities  to  marginal  buyers  are  one  of  the  determi- 
nants of  prices,  while  the  expenses  of  production  to  marginal 
sellers  are  the  other.  In  this  case  no  very  definite  conclusion 
can  be  reached  in  regard  to  prices  until  the  circumstances  de- 
termining the  normal  expenses  of  production  have  been 
considered. 

In  the  foregoing  analysis  market  prices  have  alone  been  re- 
ferred to.  In  connection  with  most  goods  there  is  behind  the 
fluctuating  market  price  a  normal  price  to  which  the  former 
tends  to  conform.  This  is  because  the  conditions  of  produc- 
tion are  more  stable  than  the  market  conditions  under  which 
goods  are  bought  and  sold,  and  serve  constantly  to  recall  prices 
from  the  more  or  less  violent  fluctuations  of  the  market.  For 
the  present,  normal  prices  may  be  defined  simply  as  the  prices 
about  which  market  prices  tend  to  fluctuate.  In  the  case  of 
freely  reproducible  goods  normal  prices  correspond  to  the  nor- 
mal expenses  of  production  of  representative  firms.  The  nor- 
mal prices  of  goods  produced  under  conditions  of  monopoly 
are,  on  the  other  hand,  the  money  prices  which  are  calculated, 
in  the  long  run,  to  afford  the  largest  profit  to  the  producer  or 
combination  of  producers  which  enjoys  the  monopoly.  In 
both  cases  the  term,  "  normal,"  designates  the  price  which 
economic  forces  tend  to  establish  under  the  given  conditions. 
The  justification  and  practical  usefulness  of  the  conception 
will  be  made  to  appear  in  subsequent  chapters. 

§  58.  This  chapter  has  attempted  to  explain  how  the  values 
and  prices  of  goods  are  determined.     It  has  been  shown  that 


Summary  105 

an  isolated  individual  tends  to  value  his  possessions  in  pro- 
portion to  their  marginal  utilities  and  that  the  latter  depend 
partly  upon  his  scale  of  wants  and  partly  upon  his  supply  of 
units  of  the  good  valued.     A  substitute  basis  for  valuation  in 
cases  where  the  goods  are  produced  as  well  as  used  was  found 
in  marginal  cost,  or  disutility.     The  rational  ordering  of  life 
causes  the  marginal  utility,  which  is  one  measure  of  value,  to 
just  equal  and  offset  the  marginal  disutility,  which  is  the  other. 
Only  when  this  is  the  case,  as  was  pointed  out,  can  an  economic 
equilibrium   be   realised.     In   industrial   society  complications 
are  encountered.     Although  still  referred  to  marginal  utility, 
value  was  found  to  result  from  the  joint  calculations  of  differ- 
ent groups  of  people  rather  than  from  the  calculations  of  single 
individuals.     It  was  finally  characterised  as  society's  estimate 
of  marginal  utility.     The  complications  on  the  side  of  cost 
were  found  to  be  even  more  serious.     The  costs  incurred  as 
production  is  carried  on  in  society  are  divided  up  among  a 
number  of  co-operating  producers.     No  one  producer,  conse- 
quently, is  able  to  judge  what  the  total  cost  of  production  is. 
Even  if  the  cost  could  be  readily  measured  there  is  no  direct 
opportunity  to  compare  it  with  utility,  as  men  usually  produce 
for  others  rather  than  for  themselves.     Valuations  based  on 
marginal  costs  apply,  therefore,  to  different  goods  from  those 
that    are    valued    by    reference    to    their    marginal    utilities. 
Finally,  it  was  shown  that  the  costs  of  production  are  borne  by 
men  in  very  different  circumstances,  so  that  very  different  costs 
enter  into  the  production  of  identical  goods  and  services.     As 
these  have  the  same  values,  costs  to  men  at  the  margin  are 
alone    influential    in    their    determination.     No    attempt    was 
made  to  clear  up  these  difficulties,  but  it  was  intimated  that  in 
spite   of  them   cost   does   influence   value   even   in   industrial 
society.     The  discussion  of  value  concluded  with  some  con- 
siderations bearing  on  the  valuation  of  complementary  goods. 
Attention  was  then  directed  to  the  nature  of  price  and  to  the 
circumstances   determining   the    value    of   money.     The   four 
possible  situations  under  which  prices  may  be  determined  were 
described   and  discussed  and   finally   the   distinction   between 
market  and  normal  prices  was  explained. 

As  has  been  indicated  at  every  point  in  this  chapter,  one  Conclusion 


io6  Value  and  Price 

factor  in  the  determination  of  the  values  and  prices  of  goods  is 
the  available  supply.  In  general,  in  accordance  with  the  law 
of  demand,  an  increase  in  the  supply  of  a  good  means  a  fall  in 
its  marginal  utility,  or  value  in  use,  and  a  corresponding  fall  in 
its  price.  Conversely  a  decrease  in  supply  means  a  rise  in 
value  and  price.  Ordinarily  the  amount  of  the  supply  of  a 
good  depends  upon  the  conditions  of  production.  In  a  some- 
what less  direct  but  no  less  vital  way  it  depends  also  upon  the 
conditions  of  distribution.  It  is  for  this  reason  that  the  treat- 
ment of  value  and  price  in  this  chapter  is  left  incomplete  until 
the  subjects  of  production  and  distribution  have  been  con- 
sidered. 

REFERENCES  FOR   COLLATERAL   READING 

*  Marshall,  Principles  of  Economics,  Book  V.;  *  Pier  son.  Principles  of 
Economics,  Part  I.,  Chap.  I.;  Clark,  Philosophy  of  Wealth,  Chaps. 
V.  and  VI.;  Smart,  Introduction  to  the  Theory  of  Value;  *Bdhm- 
Bawerk,  Positive  Theory  of  Capital,  Book  III.;  *  Fetter,  Principles 
of  Economics,  Chap.  5;  *Carver,  The  Distribution  of  Wealth, 
Chap.  I. 


CHAPTER   VI 

PRODUCTION:   LAND   AND   NATURAL   FORCES 

§  59.  Production  has  already  been  defined  as  the  creation  Production 

of  utihties.    That  man  cannot  create  matter  is  a  famihar  truth,  defined 

All  that  he  can  do  is  to  rearrange  particles  of  matter  so  as  to 

create  form  utilities ;  or  move  goods  from  one  part  of  the  world 

to  another  so  as  to  create  place  utilities;  or  preserve  goods 

from  one  period  to  another  so  as  to  create  time  utilities;  or, 

finally,  transfer  goods  from  the  ownership  of  one  individual 

to  that  of  another  so  as  to  create  possession  utilities.     Any 

activity  which  contributes  to  the  creation  of  utilities  in  either 

of  these  ways  is  production. 

A  school  of  French  economists  of  the  eighteenth  century,  the  Manufac- 
■.^.       .  1      1    1-    f  .1     i  •      1^  •  turin^  and 

Physiocrats,  gave  currency  to  the  belief  that  agriculture  is  pro-  Trading  as 

ductive  in  a  special  and  peculiar  sense.     They  even  went  so  far  Productive 
.  r  ■  ,  ,-1  .^  as  Aencul- 

as  to  characterise  manufacturing  and  mercantile  pursuits  as  ^^^.q  "^ 

sterile  or  unproductive.  Adam  Smith  took  vigorous  exception 
to  the  latter  view,  but  he,  too,  speaks  of  nature  as  "  labouring 
along  with  man  "  in  farming,  and  implies,  erroneously,  that 
man  has  little  outside  help  in  his  other  occupations.  Completer 
knowledge  of  the  real  nature  of  production  has  emancipated 
most  minds  from  these  misconceptions.  They  reappear  from 
time  to  time,  however,  in  criticisms  of  the  activity  of  merchants, 
who  are  said  to  create  nothing,  but  to  live,  like  parasites,  by 
buying  things  for  less  and  selling  them  for  more  than  they 
are  worth.  The  obvious  reply  to  such  attacks  is  that  mer- 
chants create  time,  place,  and  possession  utilities  and  that 
human  well-being  depends  as  much  upon  these  as  upon 
form  utilities.  Convincing  proof  of  the  value  of  the  services 
of  merchants  is  furnished  to  city  people  when  they  go  to  live 
in  the  country  in  the  summer  and  have  to  depend  for  the 
goods  they  require  upon  a  distant  and  ill-stocked  country 
store.     The  growing  prevalence  among  country  people  of  the 

107 


io8     Production  :  Land  and  Natural  Forces 


Factors  in 
Produc- 
tion: Na- 
ture and 
Man 


Capital 


The 

Productive- 
ness of 
Land 


practice  of  coming  to  town  to  do  their  shopping  indicates,  on 
the  other  hand,  their  practical  appreciation  of  what  the  mer- 
chant does  for  the  community.  If  there  is  just  ground  for 
complaint,  it  is  not  because  merchants  fail  to  render  useful 
service,  but  because  the  organisation  of  wholesale  and  retail 
trade  is  less  economical  than  it  might  be.  In  this  department 
of  business  the  results  of  unregulated  competition  are  less 
clearly  beneficial  than  in,  perhaps,  any  other. 

§  60.  As  already  implied,  there  are  two  essential  factors 
in  all  productive  processes :  nature  and  man.  Nature  figures  in 
production  as  an  aggregate  of  materials  and  blind  forces.  Act- 
ing in  conformity  with  invariable  laws,  she  destroys  as  readily 
as  she  creates.  Moreover,  her  productive  services  are  always- 
gratuitous  to  him  who  has  the  intelligence  to  command  them. 
Man,  on  the  contrary,  appears  as  a  being  with  conscious  pur- 
pose. He  also  destroys,  not  ruthlessly,  however,  as  nature  seenrs 
to  do,  but  in  order  to  satisfy  his  wants.  In  production  man  is 
the  directing,  active  agent,  nature  the  obedient,  passive  agency. 
Man  marshals  the  materials  and  productive  forces  which 
nature  supplies  in  the  ways  that  experience  has  taught  him  to 
be  best,  and  he  alone  enjoys  the  fruits  of  productive  enterprise. 

Man  and  nature  are  the  primary  factors  in  production ; 
secondary  or  derived  from  them  is  capital,  the  products  of  past 
industry  used  as  aids  to  further  production.  After  what  has 
been  said  of  the  revolution  which  followed  the  introduction  of 
power  machinery  and  other  forms  of  capital  there  is  little 
need  to  emphasise  the  importance  of  this  third  factor  in  produc- 
tion. To  capital  is  chiefly  due  the  efficiency  of  contemporary 
productive  methods,  as  contrasted  with  those  of  one  hundred 
and  fifty  years  ago,  and  also  the  division  of  the  working  popu- 
lation into  employers  and  employees.  These  truths  are  so 
familiar  to  everyone  that  it  is  not  so  much  the  importance  of 
capital  as  the  fact  that  it  is  itself  dependent  upon  man  that 
requires  emphasis. 

§  61.  As  the  term  is  com.monly  used  in  economics,  ''  land  " 
designates  not  only  the  surface  of  the  earth  and  the  materials 
above  and  beneath  it,  but  also  bodies  of  water  and  what  they 
contain.  The  principal  ways  in  which  land,  in  this  sense, 
assists  in  production  may  be  enumerated  as  follows:   (i)   It. 


Progress  in  Production  109 

affords  support  for  man  and  the  buildings,  etc.,  he  erects  upon 
it;  (2)  its  extension  permits  the  movement  of  men  and  goods 
from  place  to  place;  (3)  its  geographical  features,  mountains, 
valleys,  rivers,  bays,  etc.,  aid  in  many  ways;  (4)  it  supplies 
the  materials,  mineral,  vegetable,  and  animal,  from  which  all 
commodities  are  made;  (5)  each  portion  of  it  enjoys  its  share 
of  summer's  heat  and  winter's  cold,  air,  sunshine,  and  rain, 
u^ithout  which  no  form  of  life  could  long  continue  on  the 
earth.  Properly  speaking  some  of  these  endowments  of  land, 
such  as  heat  and  sunlight,  are  forces  rather  than  materials. 
The  principal  other  natural  forces  which  aid  in  production,  as 
at  present  carried  on,  are  the  force  of  gravity,  the  vital  forces 
that  cause  the  growth  of  plants  and  animals,  the  expansive 
force  of  steam,  and  electrical  force. 

Land  and  natural  forces  have  been  available  for  human  use  Progress  in 
for  one  hundred  thousand  years  or  more,  but  only  in  recent 
times  has  man  begun  to  appreciate  and  utilise  them  at  all  fully. 
His  early  discoveries  of  fire  and  its  uses,  of  methods  of  navi- 
gating by  water  and  of  the  metals,  and  his  first  domestication 
of  animals  and  cultivation  of  plants,  followed  each  other  at 
long  intervals  and  were  the  results,  there  is  reason  to  suppose, 
of  happy  accident  rather  than  of  deliberate  study  and  experi- 
ment. Only  in  the  last  two  centuries  has  systematic  progress 
been  made  in  the  task  of  understanding  nature  and  directing 
her  forces  toward  human  ends.  The  results  already  achieved 
in  analysing  materials  into  their  elements  and  gauging  accu- 
rately their  importance  for  different  uses^  in  generating  and 
controlling  steam  and  electricity,  and  in  finding  new  employ- 
ments for  these  and  other  natural  forces,  seem  to  justify  ex- 
tremely optimistic  anticipations  in  regard  to  the  future  of  the 
race  upon  the  earth.  They  have  served  in  large  measure  to 
shift  the  attention  of  economists  from  the  problems  of  produc- 
tion, which  seem  in  process  of  such  happy  solution,  to  the 
problems  of  distribution,  which  become  more  rather  than 
less  complex  as  general  wealth  increases.  There  is  the 
more  excuse  for  this  shifting  of  interest  because  different 
phases  of  production  are  beginning  to  be  dealt  with  in 
special  treatises.  "  Economic  geography  "  is  a  description  of 
the  part  which  land  and  natural   forces  play  in  production. 


no     Production:  Land  and  Natural  Forces 


Different 
Character- 
istics of 
Dift'erent 
Pieces  of 
Land 


"  Economic  geology "  treats  more  especially  of  rocks  and 
minerals  in  relation  to  human  well-being.  Similarly,  treatises 
on  agriculture,  on  mining,  and  on  different  kinds  of  manu- 
facturing, describe  the  technique  of  modern  production  in  its 
different  branches.  It  remains  for  a  treatise  on  economics 
merely  to  emphasise  the  more  general  aspects  of  the  part  that 
nature  plays  in  production. 

§  62.  It  is  a  familiar  fact  that  dift'erent  areas  of  land  are 
unequally  fitted  to  aid  production  in  the  ways  that  have  been 
described.  ]\Iost  obvious  are  diff'erences  in  geographical 
features.  There  is  but  one  New  York  Harbour  on  the  Ameri- 
can Continent,  and  its  superiority  in  all  essential  respects  to 
other  harbours  causes  every  square  foot  adjacent  to  it  to  be 
eagerly  utilised  in  the  promotion  of  a  vast  commerce.  Simi- 
larly, there  is  but  one  source  of  water  power  like  that  supplied 
at  Niagara  Falls  by  the  Niagara  River  and  there  are  no  other 
fresh  water  courses  comparable  with  the  Great  Lakes  and  the 
Mississippi  and  its  tributaries.  Though  less  unique  other  geo- 
graphical features  are  important  and  influence  in  large  meas- 
ure the  forms  of  industrial  activity  that  flourish  in  the  regions 
in  which  they  are  found.  Differences  in  mineral  resources 
are  quite  as  marked.  Geological  changes,  most  of  which 
antedated  the  appearance  of  man  upon  the  earth,  deposited 
beds  of  iron  ore  in  one  locality,  strata  of  coal  in  another,  veins 
of  gold  and  silver,  copper  and  lead  in  still  others,  and  in  others 
layers  of  barren  rock.  The  influence  which  these  mineral  de- 
posits exert  on  the  kinds  of  industry  that  are  to  be  carried  on 
in  different  sections  and  on  their  prosperity  is  too  familiar  to 
be  dwelt  upon.  Differences  in  soils,  climate,  rainfall,  and  the 
other  conditions  affecting  agriculture  are  equally  in  evidence 
and,  as  was  indicated  in  the  chapter  on  the  Industrial  Expan- 
sion of  the  United  States,  play  their  part  in  shaping  a 
nation's  industries. 

Although  most  of  the  characteristics  of  different  pieces  of 
land  are,  economically  speaking,  unalterable,  others  admit  of 
considerable  modification.  However  admirable  a  harbour  may 
be  as  fashioned  by  nature  it  can  nearly  always  be  improved  by 
man.  Important  as  were  the  Great  Lakes  as  a  natural  water 
course  their  usefulness  has  been  much  increased  by  the  con- 


Old  and  New  Countries  1 1 1 

struction  of  the  Erie,  Welland,  and  Sault  Stc.  Marie  canals. 
Even  more  marked  are  the  changes  which  man  may  make  in 
preparing  soils  for  agricultural  use.  Besides  clearing  land 
from  forests  and  from  stones  and  draining  off  surplus  water, 
he  can  often  change  comparatively  poor  to  very  good  soil  by 
means  of  fertilisers.  As  the  English  economist,  Professor 
Marshall,  has  suggested,  the  various  qualities  that  fit  a  piece  of 
land  for  the  cultivation  of  a  particular  crop  or  series  of  crops 
may  be  compared  to  the  links  of  a  chain,  and  as  the  strength  of 
a  chain  depends  upon  that  of  its  weakest  link,  so  the  fertility 
of  a  piece  of  land  depends  upon  the  quality  in  respect  to  which 
it  is  most  deficient.  In  the  same  way  that  the  strength  of  a 
chain  may  sometimes  be  increased  many  fold  by  repairing  an 
imperfect  link,  so  land  may  often  be  raised  to  a  much  higher 
plane  in  the  scale  of  fertility,  if  its  one  serious  defect  is 
remedied. 

In  new  countries  where  land  is  abundant  and  labour  and  Old 
capital  are  scarce  and  dear,  the  tendency  is  to  rely  mainly  on  countries 
the  natural  qualities  of  different  soils  and  to  make  little  use  of  Contrasted 
fertilisers.  As  a  country  becomes  more  populous  and  land  is 
in  greater  demand,  fertilisers  are  more  freely  used  and  the  tend- 
ency is  for  each  piece  of  land  to  be  supplied  artificially  with  the 
qualities  in  which  nature  has  left  it  deficient.  In  this  way 
continuous  cultivation  tends  to  obliterate  the  differences  which 
originally  distinguished  different  soils  in  the  same  general 
region  and  raise  them  towards  one  uniform  standard  of  excel- 
lence. This  makes  it  difficult  if  not  impossible  in  an  old  coun- 
try to  determine  to  what  extent  the  fertile  properties  of  a  given 
piece  of  land  are  due  to  nature  and  to  what  extent  to  man.  In 
the  United  States  it  is  probably  still  true  of  agricultural  land 
that  it  owes  the  principal  characteristics  that  fit  it  for  produc- 
tion to  nature.  This  is  even  more  the  case,  of  course,  with  its 
mineral  and  forest  lands. 

§  63.  If  attention  be  confined  to  some  particular  product.  Differences 
such  as  iron,  coal,  wheat,  corn,  or  wool,  and  a  study  be  made  "^  p'roc-uc^-^ 
of  the  conditions  under  which  it  is  produced  in  a  country  like  tion  Due  to 
the  United  States,  it  will  be  found  that  some  of  the  supply  jn  La^nd*^^^ 
comes  from  areas  where  the  natural  conditions  are  very  favour- 
able to  such  production,  that  other  portions  come  from  areas 


112     Production:  Land  and  Natural  Forces 

where  the  natural  conditions  are  less  favourable,  and  still  others 
from  areas  so  situated  that  the  production  is  barely  profitable. 
To  illustrate  by  reference  to  iron :  some  of  the  ore  is  of  such 
richness  and  is  so  easily  mined  that  each  year's  output  affords 
a  profit  to  mine  owners  and  operators  so  large  that  in  a  short 
time  it  amounts  to  a  princely  fortune.  Other  ore  is  less  rich 
and  mined  under  greater  difficulties,  but  still  pays  a  hand- 
some profit  over  all  the  expenses  of  its  production.  Still  other 
ore  barely  repays  the  expense  entailed  in  putting  it  on  the 
market.  It  may  be,  and  often  is,  the  case  in  mining  that  still 
other  ore  is  taken  out  of  the  ground  and  sold  at  an  actual  loss 
to  those  engaged  in  the  business,  the  loss  being  made  good  for 
a  time  out  of  the  capital  of  such  business  men  in  the  hope  that 
the  ore  will  improve  with  depth,  or  that  it  will  command  a 
higher  price,  or  that  something  will  occur  to  make  the  enter- 
prise a  success.  In  addition  to  this  poorest  ore  mined  there 
are  known  to  be  vast  bodies  of  ore  of  even  inferior  grades 
which  might  be  mined  and  would  be  mined  if  market  condi- 
tions were  to  change  so  as  to  make  it  profitable.  In  iron  min- 
ing and  other  branches  of  mining  there  are  thus  different  pro- 
ducers incurring  quite  different  expenses  of  production,  rang- 
ing from  those  whose  expenses  are  low  to  those  whose  ex- 
penses are  barely  covered  or  even  not  quite  covered  by  the 
price.  The  more  fortunate  receive  in  the  current  price  a  con- 
siderable margin  over  their  expenses  of  production,  which  is  to 
be  explained,  economically,  as  due  to  the  superior  natural  re- 
sources which  they  exploit. 
Farming  A  similar  situation  is  found  in  farming  and  may  be  illus- 

trated by  reference  to  the  cultivation  of  wheat.  The  expense 
entailed  in  producing  wheat  on  the  bonanza  wheat  farms  of  the 
Dakotas,  even  including  the  transportation  charge  to  the  dis- 
tant market,  is  very  considerably  less  than  the  expense  of  pro- 
ducing wheat  for  the  same  market  in  Michigan,  owing  to  dif- 
ferences in  the  favourableness  of  soil  and  climate  in  the  two 
sections.  Some  wheat  farmers  realise  regularly  year  after  year 
a  considerable  margin  above  the  expenses  of  production  in  the 
current  price,  others  realise  a  smaller  margin,  others  barely  pay 
expenses,  while,  in  some  years,  still  others  incur  a  loss  and 
have  cause  to  regret  that  they  did  not  allow  their  land  to  lie 


Law  of  Diniinishino-  Returns  1 13 

idle.  In  addition  to  the  land  used  for  wheat  there  is  still  other 
land  that  is  even  poorer  for  this  purpose,  but  that  could  and 
would  be  used  to  swell  the  country's  wheat  crop  in  case  market 
conditions  chang^ed  so  as  to  make  this  profitable.  In  wheat 
farminj];'  and  other  branches  of  farming-  there  are  thus  con- 
siderable differences  in  the  expenses  of  production  incurred  by 
different  farmers,  and  since  all  obtain  approximately  the  same 
prices  for  the  same  products  in  the  central  market,  allowing  of 
course  for  variations  in  quality,  these  dift'erences  cause  some 
to  reap  large  profits,  some  to  reap  smaller  profits,  some  to  just 
meet  their  expenses,  and  some,  perhaps,  actually  to  lose  on  the 
year's  industry.  Here  again  superior  natural  advantages  are 
the  source  of  the  higher  profits  which  some  realise. 

An  exactly  similar  situation  is  encountered  in  branches  of  Manufac- 
manufacturing  which  utilise  water  power,  the  supply  of  which  "'■^"S 
is  limited.  Those  who  control  superior  sources  of  water 
power  obtain  their  power  more  cheaply  than  their  competitors 
using  inferior  power.  So  long  as  all  manufacturers  sell  their 
products  for  the  same  market  prices  those  controlling  the 
superior  powers  must  reap  an  extra  profit  traceable  to  this 
natural  superiority. 

From  these  typical  illustrations  it  appears  that  land  and  Conclusion 
natural  forces  assist  different  producers  for  the  same  market 
unequally.  Since  they  all  receive  the  same  prices  and  since 
these  must  be  high  enough  to  cover  the  expenses  of  produc- 
tion of  the  men  who  produce  at  the  greatest  disadvantage  but 
whose  supplies  are  necessary  to  satisfy  the  demand  of  the 
market,  those  producing  under  more  favourable  conditions  must 
reap  a  profit  due  to  these  conditions.  This  special  form  of 
profit,  wdiich  in  the  aggregate  represents  an  important  share  of 
the  wealth  annually  produced,  is  known  in  economics  as  rent 
and  will  receive  further  consideration  in  the  chapter  on  that 
topic. 

§64,  But,  it  may  be  asked,  if  nature  assists  production  so  The  Law  of 

imequallv  in  dift'erent  localities,  whv  is  not  the  whole  supnlv  of  P'""ni^!'- 

.  -  '' '   ■  ingReturns 

each  particular  commodity  produced  in  that  one  spot  which  is 

best  adapted  for  the  purpose?     The  mere  statement  of  this 

question  suggests  the  answer.     All  of  the  iron  ore  needed  in 

the  United  States  is  not  produced  from  the  richest  iron  mine. 


114     Production:  Land  and  Natural  Forces 

because  that  mine  does  not  contain  enough  ore  to  satisfy  a  hun- 
dredth part  of  the  demand.  All  of  the  wheat  required  is  not 
produced  from  that  one  acre  best  suited  to  wheat  culture,  be- 
cause it  could  not  produce  a  millionth  part  of  the  wheat  needed. 
Equally  inadequate  is  the  water  power  even  of  Niagara  to 
generate  the  force  needed  to  keep  all  the  manufacturing 
machinery  in  the  country  in  motion.  Thus  if  all  the  ore  in  the 
best  mine,  if  all  the  wheat  the  best  acre  could  be  made  to  pro- 
duce, and  if  all  the  power  of  Niagara  were  made  available  in  a 
single  year,  it  would  still  be  necessary  to  have  recourse  to 
many  other  mines,  acres,  and  sources  of  water  power  to  satisfy 
the  demand  for  these  things. 
Statement  In  practice,  as  is  well  known,  it  does  not  pay  to  extract  all 
the  ore  from  ev^  i  the  richest  mine  at  too  rapid  a  rate,  nor 
to  cultivate  too  carefully  even  the  best  acre  of  land,  nor  to 
utilise  too  fully  even  the  finest  water  power.  In  each  of  these 
cases  the  producers  encounter  what  is  known  in  economics  as 
the  laio  of  diminishing  returns.  Briefly  stated  this  law  is  that 
after  a  certain  point  has  been  passed  in  the  cultivation  of  an 
acre  of  land  or  the  exploitation  of  a  mine,  increased  applica- 
tions of  labour  and  capital  yield  less  than  proportionate  returns 
in  product,  it  being  understood,  of  course,  that  no  important 
change  is  made  in  the  method  of  cultivation  or  exploitation. 
To  illustrate  by  reference  to  wheat  farming:  A  given  acre  of 
land  may  be  cultivated  in  numberless  dififerent  ways,  each  more 
elaborate  than  the  preceding  and  each  giving  rise  in  a  normal 
year  to  a  somewhat  larger  crop.  It  may  be  ploughed  once, 
twice,  three,  or  even  four  times,  and  each  ploughing  will  add 
somewhat  to  its  preparedness  to  receive  the  seed.  It  may  be 
harrowed  correspondingly.  The  use  of  fertilisers  familiar  in  the 
region  offers  a  wide  range  of  possible  variation,  each  having 
some  perceptible  effect  on  the  year's  crop.  While  the  crop  is 
maturing  a  great  number  of  different  pi"ecautions  may  be  taken 
to  protect  it  from  the  ravages  of  bir>^s,  insects,  storms,  etc.  It 
may  be  irrigated,  or  great  pain:  may  be  taken  to  drain  off 
quickly  an  excess  of  rainfall.  It  may  even,  as  is  said  to  have 
been  tried  on  the  Island  of  Guernsey,  be  covered  with  glass  at 
the  period  when  it  is  most  liable  to  injury.  In  these  and  hun- 
dreds of  other  ways  labour  and  capital  may  be  applied  w^ithout 


The  Margin  of  Cultivation  1 15 

exhausting  the  productive  capabihties  of  the  land.  Some  of 
these  possible  improvements  in  the  method  of  cultivation  be- 
yond the  roughest  scratching  over  of  the  soil  may  and  prob- 
ably will  yield  more  than  proportionate  returns  in  the  wheat 
crop,  but  after  a  certain  point  has  been  passed  all  experience 
confirms  the  law  tliat  further  improvements  aftord  less  than 
proportionate  returns.  Unless  this  were  true,  indeed,  there 
would  be  little  occasion  for  dividing  up  rural  families  and 
sending  some  of  the  sons  to  take  up  new  land.  Every  addi- 
tional hand  on  the  old  farm  would  add  his  proportion  to  the 
joint  produce  and  a  farm  of  a  hundred  acres  would  support  a 
score  of  families  as  well  as  one. 

To  give  precision  to  the  statement  of  the  law  of  diminishing  The  Exten 
returns  it  is  customary  to  distinguish  between  the  "  extensive  "  i|7tensive 
and  the  "  intensive  "  margins  of  cultivation.  If,  for  example.  Margins  of 
the  demand  for  wheat  increases  so  as  to  induce  the  production  ^  ''^^^  ^°° 
of  a  larger  crop,  the  additional  supply  may  come  from  either  or 
both  of  two  sources.  Wheat  farmers  in  the  settled  portions  of 
the  country  may  make  their  farming  more  intensive,  that  is, 
apply  more  labour  and  capital  to  the  cultivation  of  each  acre 
and  in  this  way  add  to  their  crops.  Others  may  be  induced 
to  take  up  new  land  and  prepare  it  hastily  for  "  extensive  farm- 
ing." If  both  results  follow  the  prospect  of  a  somewhat  higher 
price  for  wheat,  as  they  would  if  farmers  were  always  alert  to 
their  own  interests  and  ready  to  adapt  their  methods  to  chang- 
ing market  conditions,  there  will  be  two  situations  in  which 
the  expenses  of  producing  wheat  are  just  covered  by  the  price. 
The  wheat  grown  on  the  poorest  land  hastily  ploughed  and 
planted,  or  on  "  the  extensive  margin  of  cultivation  "  will 
barely  repay  the  expenses  of  production.  So  also  will  the  ad- 
ditional wheat  raised  by  the  application  of  additional  labour 
and  capital  on  the  "  intensive  margin  of  cultivation."  The  pro- 
ducer at  either  margin  may  in  such  a  case  be  properly  described 
as  the  marginal  producer  whose  expenses  of  production  are 
just  covered  by  the  price  of  the  product.  The  fact  that  his 
additional  wheat  just  about  pays  for  itself  will  not,  of  course, 
prevent  the  farmer  at  the  intensive  margin  from  realising  a 
rent  on  that  wheat  which  he  continues  to  produce  at  smaller 
proportionate  expense. 


ii6     Production:  Land  and  Natural  Forces 


Other  Dif- 
ferences in 
Lands 


An 
Illustration 


In  the  mining  industry  there  will  not  be  the  same  tendency 
to  hasten  the  exploitation  of  each  mine  up  to  the  point  at  which 
the  price  just  covers  the  expense  of  getting  out  the  most  ex- 
pensive ore,  because  the  bed  of  ore  is,  even  while  still  under 
ground,  a  store  of  wealth  to  the  mine  owner.  Uusally,  after  he 
has  demonstrated  the  value  of  the  deposit  he  will  prefer  to  mine 
it  in  the  most  economical  way  without  much  attention  to  price 
fluctuations.  In  mining,  therefore,  it  is  at  the  extensive 
margin  of  exploitation,  that  is,  in  connection  with  the  poorest 
mines,  rather  than  at  the  intensive  margin,  that  the  expenses 
of  production  that  influence  price  are  to  be  found. 

§  65.  In  the  preceding  sections  the  natural  differences  be- 
tween different  pieces  of  land  have  been  discussed  as  though 
they  alone  determined  the  importance  of  land  to  man.  That  this 
is  far  from  being  the  case  is  illustrated  on  every  hand.  Each 
year  sees  large  tracts  of  land  in  the  United  States  enhanced  in 
value  simply  because  of  changes  in  market  conditions  or  im- 
provements in  the  means  of  transporting  products  to  the  market. 
To  some  extent  the  growth  of  markets  is  itself  determined  by 
natural  conditions,  but  it  will  be  simpler  to  regard  it  as  the 
result  of  social  changes.  A  few  illustrations  will  indicate  how 
important  such  social  changes  are  in  determining  the  value  of 
land  and  the  amount  of  the  extra  profit  or  rent  which  fa- 
vourably situated  land  affords. 

Contrast,  for  example,  the  iron  and  coal  deposits  of  China 
with  those  of  the  United  States.  Well-informed  geologists 
assert  that,  from  the  point  of  view  of  natural  richness,  those  of 
China  are  scarcely  if  at  all  inferior  to  those  of  America.  From 
every  other  point  of  view  the  latter  have  been  and  will  be  for 
many  years  the  superior.  This  is  because  the  tool  and  machine 
using  habits  of  Americans,  their  steel  railroads,  steel  cars,  steel 
steamships,  etc.,  represent  an  enormous  demand  for  these  com- 
modities and  make  the  exploitation  of  such  deposits  exceed- 
ingly profitable.  There  are  indications  that  China  is  about 
to  enter  upon  an  industrial  revolution  similar  to  that  through 
which  Japan  has  passed  in  the  last  generation  and  that  as  time 
goes  on  changed  social  conditions  will  cause  coal  and  iron  to 
be  appreciated  there  somewhat  as  they  have  been  for  a  cen- 
tury in  the  Western  World.     Such  a  revolution  will,  of  course, 


Suburban  vs.  Country  Plots  117 

cause  an  immense  increase  in  the  value  of  the  now  practically 
worthless  iron  and  coal  deposits  of  the  country  and  enable  the 
fortunate  owners  of  the  richer  of  those  deposits  to  reap  large 
profits  or  "  rents  "  from  their  exploitation. 

Next,  contrast  an  acre  of  agricultural  land  on  the  outskirts  Suburban 
of  a  large  city  with  an  equally  fertile  acre  many  miles  from  ^^u^trv 
any  centre  of  population.  The  first  point  to  be  observed  is  the  Plots  ot 
different  uses  to  which  the  two  pieces  of  land  will  be  put.  The  contrasted 
back-country  acre  will  be  sown  with  some  staple  crop,  such  as 
wheat,  corn,  or  cotton,  since  it  alone  will  repay  the  expenses  of 
transportation  to  the  distant  market.  To  it  labour  and  capital 
will  be  applied  probably  only  up  to  the  point  where  the  tendency 
to  diminishing  returns  shows  itself,  because,  in  the  given  situa- 
tion it  will  pay  better  to  apply  additional  labour  and  capital  to 
new  land  than  to  press  cultivation  beyond  this  point.  The 
suburban  acre,  on  the  other  hand,  will  be  sown  with  the  most 
delicate  and  perishable  vegetables  in  demand  in  a  city  market. 
Labour  and  capital  in  the  form  of  fertilisers,  etc.,  will  be  ap- 
plied far  beyond  the  point  of  diminishing  returns  because  the 
quantity  of  land  near  the  city  which  can  be  utilised  for  truck 
farming  is  exceedingly  limited  and  city  prices  for  green  vege- 
tables are  so  high  that  very  intensive  cultivation  is  profitable. 
From  the  point  of  view  of  profit  the  back-country  farmer  may 
be  on  the  very  margin  of  extensive  cultivation,  that  is,  his  ex- 
penses, increased  largely  by  the  freight  he  must  pay  to  get  his 
crop  to  market,  may  just  about  equal  the  price  he  receives  for 
his  crop.  The  suburban  farmer,  the  native  fertility  of  whose 
land  was  assumed  to  be  the  same,  is  sure  to  reap  a  high  rent 
from  his  business.  The  final  "  doses  "  of  labour  and  capital  he 
applies  to  his  land  may  be  just  paid  for  in  the  price  he  gets  for 
the  additional  produce  that  results  from  them.  It  is  to  his 
interest  to  continue  his  cultivation  so  long  as  it  is  remunerative. 
But  all  earlier  applications  of  labour  and  capital  will  be  more 
than  covered  by  the  price  received  for  what  they  added  to  the 
product.  As  a  whole  his  acre  will  show  at  the  end  of  the 
year  a  high  rent  over  expenses,  ascribable  tb  its  nearness  to 
the  market  or  to  social  rather  than  to  natural  conditions. 

A  still  more  striking  contrast  is  presented  by  a  comparison  of 
city  real  estate,  priced  by  the  front  foot,  with  agricultural  land, 


ii8     Production:  Land  and  Natural  Forces 


City  and 
Country- 
Plots  of 
Land 
Contrasted 


Conclusion 


priced  by  the  acre.  Next  to  man's  need  for  food  and  clothing 
comes  his  need  for  a  shelter  or  for  a  home.  The  former  may 
be  produced  at  great  distances  and  brought  to  him  from  day 
to  day  in  the  small  quantities  that  he  requires.  The  latter 
must  be  available  in  its  entirety  all  the  time,  and  it  must  not 
be  so  far  away  from  his  place  of  business  as  to  make  his  daily 
trips  back  and  forth  unduly  irksome.  This  accounts  for  the 
fact  that  when  land  begins  to  be  thought  of  for  building  pur- 
poses its  importance  is  at  once  greatly  enhanced  in  human  esti- 
mation. The  more  concentrated  the  activities  of  a  city  and 
the  larger  its  population,  the  greater  will  be  the  demand  for 
each  piece  of  land  favourably  situated  for  building.  Thus  as 
a  place  changes  from  a  country  four-corners  to  a  village,  then 
to  a  town,  and  then  to  a  city,  the  values  of  building  sites  within 
its  limits  tend  to  rise,  although  with  many  fluctuations  as  re- 
gards particular  quarters,  and  the  rents  which  their  utilisation 
affords  to  increase  correspondingly.  The  invention  of  the 
bicycle,  the  trolley-car,  and  other  conveniences  for  passing 
quickly  and  easily  from  one's  place  of  business  to  one's  home 
may  check  this  tendency  somewhat,  and  if  these  improve- 
ments follow  each  other  rapidly  may  check  it  entirely  or  set 
up  a  counter  tendency,  but  during  the  last  quarter  of  a  cen- 
tury the  increase  in  the  value  of  city  real  estate  and  of  the 
rents  that  such  property  affords  has  been  a  phenomenon  com- 
mon to  all  civilised  countries.  How  far  this  may  go  in  par- 
ticular instances  is  Illustrated  by  the  fact  that  a  lot  sold  in  the 
heart  of  London  recently  for  a  price  ./hich  would  make  an 
acre  of  imimproved  land  in  that  locality  W'Orth  $2,300,000.  In 
some  sections  of  New  York  City  land  is  equally  vakiable.  In 
these  cases  also  the  increased  value  and  correspondingly  en- 
larged annual  return  are  ascribable  to  social  rather  than 
natural  conditions. 

Generalising  on  these  illustrations,  we  may  conclude  that  dif- 
ferences in  situation  in  respect  to  markets  and  other  social  con- 
ditions are  quite  as  influential  as  natural  dift'erences  in  deter- 
mining the  importance  of  different  pieces  of  land  and  the  rents 
they  afford.  When  these  social  conditions  are  created  by  the 
forethought,  enterprise,  and  labour  of  some  particular  indi- 
vidual or  group  of  individuals,  as  when,  for  example,  a  suburb 


The  Rent  of  Land  1 19 

is  deliberately  planned  and  brought  into  being  by  a  syndicate 
of  real-estate  operators,  we  have  a  case  similar  to  that  presented 
by  the  modification  of  the  character  of  the  land  by  drainage  or 
fertilisation,  in  which  it  is  very  hard  to  distinguish  man's  pur- 
posive share  in  the  result  from  the  share  of  an  unconsciously 
evolving  community.  These  difficulties  receive  fuller  con- 
sideration in  the  chapters  on  Distribution. 

§  66.  In  this  chapter  attention  has  been  called  to  the  natural  Summary 
differences  between  different  pieces  of  land,  to  the  law  of 
diminishing  returns  which  restrains  men  from  trying  to  derive 
more  than  a  certain  product  from  each  piece  of  land,  and  to  the 
special  profit  or  rent  which  arises  in  consequence  of  the  fact 
that  lands  of  dift'erent  qualities  are  employed  to  supply  the 
same  commodities  in  the  same  markets.  It  has  just  been  shown 
that  differences  in  situation  in  relation  to  markets  are  equally 
potent  in  determining  rents. 

In  discussing  rents  it  has  been  assumed  that  the  man  who  The  Rent 
uses  the  land  is  also  the  land  owner.  In  European  coun-  Land 
tries  and  to  an  increasing  extent  in  the  United  States  this 
is  not  the  case.  Land  ownership  is  coming  to  be  more  and 
more  divorced  from  land  utilisation  and  as  a  result  the 
extra  profit  ascribable  to  the  superiority  of  particular  pieces 
of  land  is  clearly  distinguishable  from  other  forms  of  profit 
going  to  the  cultivator  or  occupier.  It  must  be  paid  as  "  rent  " 
to  the  land  owner,  or  the  latter  will  prefer  to  cultivate  or  occupy 
the  land  capable  of  aft'ording  such  profit  himself.  In  future 
this  share  of  wealth  will  always  be  referred  to  as  "  rent  "  to 
distinguish  it  from  other  shares  to  which  the  designation 
"  profits  "  more  properly  belongs. 

REFERENCES  FOR   COLLATERAL   READING 

* Marskall,  Principles  of  Economics,  Book  IV..  Chaps.  I.,  II.,  and 
III.;  Walker,  Political  Economy,  Part  II.,  Chap.  I.,  and  •  Land  and 
Its  Rent;  Nicholson,  Principles  of  Political  Economy,  Vol.  I.,  Book 
I.,  Chaps.  II.  and  IV. 


CHAPTER   VII 


PRODUCTION  :   LABOUR   AND   CAPITAL 


Labour  as 
a  Factor  in 
Production 


Qualities 
Influencing 
Productive- 
ness of     • 
Labourer 


§  67.  Of  co-equal  importance  with  nature  as  a  factor  in  pro- 
duction is  man.  His  contribution  to  the  productive  result  de- 
pends partly  upon  his  capacity  as  an  individual  and  partly  upon 
the  way  in  which  his  efforts  are  applied,  that  is,  whether  to 
direct  or  to  capitalistic  processes  of  production,  or  whether 
independently  or  in  co-operation  with  the  organised  efforts  of 
others.  Each  one  of  these  circumstances  merits  separate  con- 
sideration. 

The  principal  qualities  which  determine  an  individual's 
capacity  as  a  producer  are  the  following:  (i)  health,  (2) 
physical  strength  and  endurance,  (3)  intelligence,  (4)  judg- 
ment, (5)  ambition,  (6)  energy,  (7)  perseverance,  (8)  imagi- 
nation, (9)  mechanical  ingenuity,  and  (10)  technical  knowl- 
edge. The  importance  of  health  and  physical  strength,  espe- 
cially to  those  doing  manual  work,  is  obvious.  Intelligence 
and  judgment  are  important  adjuncts  to  the  man  with  pick 
and  shovel ;  they  are  indispensable  to  men  in  the  higher  grades 
of  industry.  Ambition,  energy,  and  perseverance  are  quali- 
ties that  characterise  all  the  world's  greatest  men,  and  without 
which  other  qualities  are  of  little  value.  Imagination  is  im- 
portant because  to  it  are  traceable  all  great  industrial  inven- 
tions and  discoveries.  Mechanical  ingenuity,  though  less 
important  to  the  mass  of  men  than  formerly,  when  fewer  tasks 
were  performed  by  automatic  machinery,  is  still  a  valuable 
quality.  Technical  knowledge,  on  the  other  hand,  gains  each 
year  in  importance  as  the  ways  of  doing  things  that  are  found 
to  be  most  efficient  increase  in  complexity.  It  is  evident  that 
the  importance  of  these  different  qualities  depends  upon  the 
kind  of  work  to  be  done  and  that  industrial  progress  tends  to 
lessen  the  importance  of  some  while  it  increases  that  of  others. 

§  68.  The  above  qualities,  like  other  human  characteristics- 


120 


Health  and  Strength  12 1 

are  either   inherited   or  acquired.     Whatever   their  origin   in  Qualities 
special  cases  the  same  general  conditions,  acting  either  on  sue-  inhedted^ 
cessive  generations  or  on  living  men,  account  for  their  presence,  or  Acquired 
Having  in  mind   especiall}'  the  inlluences  at^ecting  the  Ger- 
manic race,  to  which  a  large  proportion  of  the  most  advanced 
peoples  of  the  present  day  belong  (Americans,  English,  Ger- 
mans, etc. ) ,  we  may  say  a  few  words  in  regard  to  each  quality. 

The  conditions  influencing  health  and  strength  are  well  Health  and 
understood.  Fresh  air  and  exercise,  good  food,  adequate  pro- 
tection from  dampness  and  sudden  changes  in  temperature,  and 
the  avoidance  of  all  kinds  of  excesses,  are  the  principal  requi- 
sites. Of  these  good  food  is  perhaps  the  most  important. 
The  human  body  resembles  a  machine,  and  the  amount  of  work 
it  can  do  depends  very  largely  on  the  quality  and  quantity  of 
the  fuel,  that  is,  the  food,  with  which  it  is  supplied.  Up  to  the 
time  of  the  industrial  revolution  Germanic  peoples  enjoyed 
many  of  the  above  conditions  and  the  physique  of  the  race 
was  consequently  well  developed.  The  introduction  of 
machinery  has  served  to  concentrate  the  populations  of  ad- 
vanced countries  to  an  ever-increasing  extent  in  cities  and  to 
substitute  for  open-air  work,  work  indoors  in  shops  and  fac- 
tories. There  has  been  reason  to  fear  that  this  might  perma- 
nently impair  the  health  and  vigour  of  those  very  peoples  which 
have  led  in  the  race  for  industrial  ascendency,  not  only 
because  of  its  direct  effect,  but  also  because  the  monotony  of 
such  labour  fosters  dissipation.  To  counteract  these  evil  tend- 
encies vigorous  measures  have  been  resorted  to,  notably  in 
England  and  German}-,  where  sanitation  and  factory  acts  have 
been  passed  by  the  government  and  where  coffee-houses,  work- 
ingmen's  clubs,  etc.,  as  substitutes  for  the  saloon,  have  been 
created  through  the  efforts  of  private  individuals.  A  great 
deal  of  attention  is  being  given,  especially  in  those  countries 
which  maintain  large  standing  armies,  to  the  question  of  de- 
termining what  diets  are  best  for  people  doing  different  kinds 
of  work,  and  model  kitchens  are  being  organised  in  the  poorer 
quarters  of  cities  to  teach  people  to  appreciate  nutritious  and 
properly  prepared  foods.  Eft'orts  to  improve  the  tenement 
houses  in  which  the  populations  of  the  larger  cities  live  are 
also  being  put  forth  and  with  some  success.     Finally  mention 


122         Production:  Labour  and  Capital 

should  be  made  of  the  pubhc  baths,  the  playgrounds  for  chil- 
dren, and  the  open-air  gymnasiums  which  are  being  erected  in 
those  cities  in  Europe  and  America  which  are  most  progressive 
in  caring  for  their  inhabitants.  As  is  shown  by  mortality 
statistics,  these  efforts  are  beginning  to  bear  fruit  in  the  im- 
proved health  of  present-day  city  populations,  but  much  yet 
remains  to  be  done  for  both  city  and  country  people.  There  is 
no  form  of  philanthropic  activity  which  is  more  certain  to  benefit 
mankind  than  that  designed  to  improve  the  conditions  under 
which  the  mass  of  men  live  and  work.  Restored  health  and 
vigour  are  blessings  in  themselves,  but  equally  important  is  the 
fact  that  they  make  for  more  efficient  production  and  enable 
their  possessors  not  only  to  hold  what  they  have  gained,  but  to 
steadily  add  to  their  advantages  through  their  increased  earn- 
ing power.  Every  improvement  that  can  be  made  in  home  and 
factory  surroundings  without  undermining  the  independence 
and  self-respect  of  the  population  is  thus  a  certain  means  of 
"  helping  people  to  help  themselves." 
Intelligence  The  development  of  intelligence  and  judgment  depends 
Judgment  largely  upon  education,  and  here  too  undoubted  progress  has 
been  made.  In  place  of  the  formal  and  traditional  methods 
that  have  prevailed  in  the  schools,  methods  having  direct 
reference  to  the  organic  development  of  children  are  begin- 
ning to  be  introduced.  Moreover,  the  proportion  of  children 
who  go  to  school  is  on  the  increase,  and  the  expenditures  that 
modern  states  make  for  public  education  are  growing.  Never- 
theless there  is  still  much  to  criticise  in  current  educational 
practices  and  in  the  short-sightedness  of  democratic  states  in 
not  contributing  even  more  liberally  to  the  support  of  educa- 
tion. In  it  lies  the  hope  of  the  future,  since  through  its  agency 
the  standards  of  each  generation  of  children  are  elevated. 
These  higher  standards  may  be  passed  on  to  the  next  genera- 
tion of  children  to  be  raised  still  further  in  the  schools,  and  so 
the  process  may  be  repeated  with  steady  progress  as  its  neces- 
sary consequence.  If  improving  educational  advantages  are 
added  to  steadily  improving  home  suroundings,  the  advance 
of  the  race  cannot  fail  to  be  rapid. 

Ambition,  energy,  and  perseverance  depend  partly  upon  a 
people's  range  of  wants  in  comparison  with  the  means  to  their 


Ambition  and  Knowledge  123 

satisfaction,  and  partly  on  the  probability  which  the  situation  Ambition, 
presents  that  effort  and  enterprise  will  be  crowned  with  sue-  f^^^^^^^ 
cess.  These  qualities  are  conspicuously  lacking  among  a  severance 
people  which  has  developed  few  wants  and  whose  means  of 
livelihood  are  so  limited  by  natural  conditions  that  even  the 
greatest  efforts  cannot  result  in  a  large  command  over  economic 
goods.  They  are  as  conspicuously  present  among  a  people 
with  numerous  and  varied  wants  to  which  are  open  a  great 
variety  of  promising  ways  of  acquiring  wealth.  This  contrast 
is  well  illustrated  by  the  difference  between  the  peasantry  of 
Europe  and  the  plain  people  of  America.  Poverty  of  resources 
and  the  restrictions  of  a  class  organisation  of  society  tend  to 
stifle  the  ambitions  of  the  former  as  markedly  as  wealth  of  re- 
sources and  absence  of  rigid  class  barriers  tend  to  stimulate 
those  of  the  latter.  The  most  desirable  situation  for  the  fos- 
tering of  these  qualities  is  evidently  one  in  which  different 
scales  of  living  prevail  side  by  side  and  in  which  at  the  same 
time  a  fair  degree  of  equality  of  opportunity  is  preserved.  The 
dangfer  in  a  countrv  like  the  United  States  is  that  an  aris- 
tocracy  of  wealth  niay  grow  up  to  monopolise  the  easiest  means 
for  acquiring  further  wealth  and  to  hold  the  mass  of  the  people 
down  to  working  for  mere  wages.  Under  such  circumstances 
different  scales  of  living  would  foster  not  ambition  but  merely 
envy  and  bitterness  in  the  minds  of  those  who  have  little  pros- 
pect of  improving  their  condition.  This  danger  must  be  kept 
in  view  in  connection  with  the  question  of  the  limitations  that  it 
may  be  desirable  to  impose  upon  monopolies  and  the  rights 
of  property. 

The   conditions   favourable   to  the  growth   of   imagination,  imagina- 

mechanical  ingenuitv.  and  technical  knowledge  call  for  no  ex-  *^°"'  ^"se- 
*  -  .     ^  nuitv,  and 

tended  discussion.  Imagination  is  still  little  understood.  It  Knowledge 
seems  to  be  fostered  by  variety  of  surroundings  and  experi- 
ences, and  by  attention  to  unsolved  problems  which  contain  an 
element  of  mystery.  Perhaps  the  most  that  is  to  be  hoped  for 
from  present  educational  methods  is  that  they  will  permit  some 
part  of  the  imagination  which  seems  to  be  natural  to  childhood 
and  youth  to  be  carried  on  into  manhood.  Manual  training,  to 
which  more  and  more  attention  is  being  given  in  the  United 
States    and    abroad,    is,    of    course,    directly    productive    of 


124         Production:  Labour  and  Capital 

mechanical  ingenuity.  Perhaps  the  greatest  progress  made  in 
connection  with  any  of  the  enumerated  quahties  is  to  be  found 
in  the  field  of  technical  knowledge.  Technical  schools,  courses 
in  colleges  and  universities,  correspondence  and  evening 
classes,  and  journals  unite  to  bring  the  knowledge  necessary 
to  efficient  production  within  the  reach  of  all,  aspiring  enough 
to  desire  it.  This  progress  has  gone  so  far  already  that  there 
seems  to  be  more  danger  that  technical  education  will  be  begun 
too  early  than  that  too  little  attention  will  be  given  to  it.  In 
addition  to  these  admirable  facilities  for  disseminating  knowl- 
edge already  acquired,  more  and  more  attention  is  being  de- 
voted to  the  acquisition  of  new  knowledge.  Every  State  in 
the  United  States  has  at  least  one  privately  or  publicly  en- 
dowed university  intended  to  encourage  scientific  research. 
To  supplement  these  are  the  national  institutions  dedicated  ex- 
clusively to  research  work,  the  Smithsonian,  and  the  recently 
founded  Carnegie  Institute.  Moreover,  many  individuals  are 
devoting  their  lives  and  their  fortunes  to  experiments  directed 
towards  discovering  improved  methods  of  satisfying  human 
wants.  Taking  all  of  these  things  into  account  we  may  pre- 
dict with  confidence  continued  progress  in  the  technique  of 
production. 
Evolution  Co-operating  with  the  conditions  favourable  to  the  develop- 

Production  rn^nt  of  individual  capacity  that  have  been  enumerated  are  the 
silent  forces  of  evolution.  Although  interfered  with  by  the 
growth  of  benevolent  instincts  and  agencies  which  intervene 
to  preserve  many  of  the  unfit  from  destruction,  these  forces  aid 
powerfully  in  the  process  by  which  each  people  surrounded  by 
a  favourable  environment  becomes  fitted  to  make  fullest  use  of 
that  environment.  Weak  and  incapable  lines  of  heredity  are 
cut  ofif  in  each  generation  and  the  field  is  left  to  the  stronger 
and  more  capable.  In  prosperous  communities  the  weeding- 
out  process  affects  not  merely  the  underdeveloped  and  underfed, 
but  the  overdeveloped  and  overfed.  Dissipation  is  as  common 
a  cause  of  premature  death  and  failure  to  continue  the  line  of 
heredity  as  starvation.  Evolution  thus  operates  not  only  to 
enable  each  succeeding  generation  to  get  a  larger  return  for  its 
efforts,  but  to  educate  it  to  a  wiser  use  of  its  material  advan- 
tages.    The  surviving  type  of  successful  man  is  less  and  less 


Capitalistic  Production  125 

self-indulgent  and  more  and  more  philanthropic  in  his  instincts 
and  habits  as  generation  follows  generation.  From  this  it  re- 
sults that  progress  itself  causes  more  and  more  attention  to  be 
devoted  to  the  conditions  leading  to  progress  and  hence  tends 
to  be  a  cumulative  process. 

§  C9.  Given  a  certain  standard  of  individual  capacity  on  the  Capitalistic 
part  of  a  labouring  population,  its  productiveness  depends  next  ^°  "^  ^^^ 
upon  the  extent  to  which  its  methods  are  capitalistic.  By 
capitalistic  production  is  meant  production  which  attains  its 
ends,  not  by  the  direct  and  immediate  creation  of  consumable 
goods,  but  indirectly  through  the  creation  first  of  tools, 
machines,  and  other  material  aids  to  production  and  the  crea- 
tion subsequently  with  the  help  of  these  capital  goods,  of  the 
consumable  goods  desired.  Capitalistic  production  is  thus 
roundabout  instead  of  direct,  and  involves  a  longer  interval  of 
time  between  its  inception  and  its  completion.  It  can  be 
adopted  only  by  men  who  arc  willing  to  forego  immediate 
gratifications  and  permit  their  incomes  to  assume  the  interme- 
diate form  of  capital  goods  so  that  in  the  end  a  larger  output 
of  consumable  goods  may  result.  Such  conduct  involves 
abstinence  from  present  consumption,  saving  income  or  pro- 
ductive powers  instead  of  using  them  to  minister  to  immediate 
consumption,  and  zvaifiiig  until  the  longer  productive  process 
shall  be  completed.  "  Abstinence,"  as  the  term  is  here  em- 
ployed, denotes  simply  not  doing  something  that  ordinarily  it 
would  be  pleasant  to  do.  It  need  not  necessarily  involve  any 
element  of  pain  or  sacrifice,  because  the  purpose  accomplished 
through  it  may  be  even  pleasanter  than  the  things  abstained 
from.  Usually,  however,  abstaining  from  present  consump- 
tion docs  involve  some  sacrifice  for  the  psychological  reason 
already  explained.* 

The  superiority  of  capitalistic  over  direct  production  and  the  Advan- 

reasons  for  it  will  appear  clearlv  from  a  few  illustrations.    One  tages  of 

r    1  1        r  r^'  ,  •  •       •  1       1  Capitalistic 

Of  the  most  urgent  needs  of  Crusoe  on  his  sea-girt  island  was   Production 

fresh   water.     Having  found   a   spring  he  might   satisfy   this 

need  by  scooping  up  the  water  with  his  hands.     This  would  be 

direct  production.     Or  he  might  make  a  cup  of  bark  in  which 

he  could  dip  out,  by  stooping  once,  all  of  the  water  he  could 

*  Chapter  IV.,  Section  36. 


126        Production:  Labour  and  Capital 

drink.  Such  a  cup  would  be  a  capital  good  and  the  process 
would  be  capitalistic  production.  It  would  multiply  largely 
the  return  resulting  from  the  ettort  of  stooping.  Or  he  might 
fashion  a  larger  vessel  in  addition  to  his  cup  with  which  he 
could  dip  out  at  one  time  all  of  the  water  he  required  for  a 
whole  day.  This  would  be  more  highly  capitalistic  produc- 
tion. Its  advantage  would  be  that  it  would  enable  him  to 
stock  his  hut  with  all  the  water  he  required  by  making  but  one 
trip  a  day  to  the  spring.  Or,  finally,  if  the  spring  happened  to 
be  at  a  higher  level  than  his  hut,  he  might  construct  a  trough 
of  hollowed  logs  capable  of  conducting  the  water  from  its 
source  to  his  very  door.  This  would  be  much  more  highly 
capitalistic  production  than  any  of  the  other  processes,  but  its 
return  would  be  correspondingly  larger.  The  force  of  gravity 
would  now  relieve  Crusoe  entirely  from  the  task  of  carrying  the 
water,  and  all  that  he  would  need  to  do  to  secure  an  abundant 
supply  would  be  to  keep  his  trough  in  repair. 

These  illustrations  are  typical  of  the  advantages  of  capital- 
istic production.  It  enables  man  to  apply  his  own  efforts  more 
effectively,  as  when  he  uses  tools  or  implements,  or  to  command 
the  assistance  of  natural  forces  which  without  the  aid  of  capital 
goods  would  be  beyond  his  control.  The  forces  of  gravity, 
steam,  and  electricity  can  be  utilised  eft'ectively  only  in  connec- 
tion with  the  forms  of  capital  appropriate  to  them.  For  these 
reasons  a  given  expenditure  of  effort  in  capitalistic  production 
is  usually  more  fruitful  of  results  than  the  same  expenditure  in 
direct  production,  and  the  more  highly  capitalistic  or  prolonged 
the  process  the  larger,  generally,  the  return  in  consumable 
goods  for  each  unit  of  effort  expended. 
Capital  §  70.  Business   men   are   in    the   habit   of   speaking   not   of 

Capital  "  capital  goods,"  but  of  "  capital."     By  this  they  mean  some- 

times capital  goods  themselves,  but  more  often  these  goods 
measured  in  terms  of  money.  Capital  goods  wear  out  and  need 
to  be  replaced.  Individually  they  come  into  being,  are  used, 
and  are  then  discarded.  But  capital,  as  the  business  man 
understands  it,  is  more  permanent.  It  is  the  complex  of  capi- 
tal goods  used  in  connection  with  each  branch  of  production 
measured  in  terms  of  money.  To  the  extent  that  prices  are 
stable  and  that  the  efficiency  of  production  is  maintained  the 


Varieties  of  Capital  Goods  127 

money  equivalent  of  this  complex  of  capital  goods  changes 
little  if  at  all.  Each  year's  inventory  shows  about  the  same 
aggregate,  although  each  year  the  particular  capital  goods  em- 
braced in  the  inventory  are  different  from  those  of  the  year 
before. 

§  71.  In  comparing  different  methods  of  capitalistic  produc-  Fixed  and 
tion  two  factors  must  be  considered :  the  average  amount  of  Jr^irculaiing 
capital  required  for  each  process  and  the  average  time  that  Goods 
elapses  in  each  case  before  this  capital  is  completely  used  up  or 
converted  into  consumable  goods.  For  example,  compare  two 
branches  of  manufacturing  in  one  of  which  the  entire  equip- 
ment of  capital  goods  has  to  be  renewed  on  an  average  once  a 
year,  while  in  the  other  the  equipment  requires  renewal  only 
once  every  two  years.  If  each  factory  requires  exactly  the 
same  amount  of  capital  from  day  to  day  the  first  will  require 
for  continuous  production  twice  as  large  a  replacement  fund 
as  the  second  because  its  capital  goods  wear  out  twice  as  fast. 
Economists  give  precision  to  the  contrast  indicated  in  the  illus- 
tration by  distinguishing  between  fixed  and  circulating  capital 
goods.  Fixed  goods  are  those  which  endure  for  some  little 
time  without  replacement.  Circulating  goods  are  those,  like 
coal,  which  are  destroyed  in  a  single  use.  It  is  obvious  that 
these  are  relative  terms  and  that  capital  goods  present  all  pos- 
sible gradations  of  fixity. 

Capital  goods  differ  also  in  the  extent  to  which  they  are  Specialised 
specialised  or  free,  or  in  their  mobility.     Raw  materials  such  as  Capital  ^ 
coal,  iron,  etc.,  are  as  a  rule  very  mobile.     They  may  be  de-  Goods 
voted  at  will  to  any  one  of  a  dozen  different  productive  uses. 
On  the  other  hand,  machines,  buildings,  etc.,  are  highly  special- 
ised and  either  cannot  be  diverted  to  any  other  use  than  that 
for  which  they  were  originally  designed  or  not  without  a  great 
loss  in  value.     Pennanent  improvements  in  land  are  of  course 
quite  immobile  and  an  unwise  creation  of  this  type  of  capital 
goods    may    result    in    complete    loss    without    possibility    of 
recovery. 

Some  writers  assert  that  of  all  forms  of  capital,  money  is  ^^oney 
the  most  mobile,  having  in  mind  the  ease  with  wdiich  it  may  be 
exchanged   for   other  goods.     This  important  quality   is  not 
mobility,   but   exchangeability.      From   the  point  of  view  of 


Fixed 

Capital 

Increasing 


Labour 
Subject  to 
Law  of  Di- 
minishing 
Returns 


128        Production:  Labour  and  Capital 

mobility,  money  is  a  highly  specialised  capital  good.  This  is 
particularly  true  of  paper  money,  which  becomes  practically 
valueless  when  deprived  of  its  monetary  quality. 

With  the  industrial  progress  of  the  world  the  proportion  of 
fixed  and  specialised  capital  goods  shows  a  tendency  to  in- 
crease. This  results  in  lessened  mobility  for  capital  goods  as 
a  whole  and  is  one  of  the  causes  of  the  prolonged  periods  of 
depression  which  invariably  follow  business  crises  imder  present 
conditions. 

§  ^2.  In  discussing  the  part  which  land  and  natural  forces 
play  in  production,  it  was  pointed  out  that  they  yield  dimin- 
ished returns  to  human  industry  after  a  certain  point  has  been 
passed  in  their  utilisation.  A  similar  law  of  diminishing  re- 
turns applies  to  labour  and  capital.  This  may  be  shown  by 
assuming  one  factor  fixed  while  the  other  increases.  Con- 
sider for  example  the  case  of  a  Crusoe  so  abundantly  supplied 
with  land  of  the  best  quality  that  he  has  no  experience  of  les- 
sened returns  from  that  quarter.  Assume  him  to  be  cast  upon 
his  island  with  a  very  limited  stock  of  capital  goods,  but  with 
full  knowledge  of  the  superiority  of  capitalistic  production  and 
with  sufficient  resolution  to  provide  himself  with  other  capital 
goods  as  rapidly  as  his  situation  permits.  He  will  have  in 
mind  a  list  of  the  capital  goods  which  he  requires,  arranged 
probably  in  the  order  of  their  importance.  A  cup,  a  pail,  a 
bow  and  some  arrows,  a  boat,  etc.,  will  be  some  of  the  things 
he  will  plan  to  make.  For  a  time  the  capital  goods  he  fashions 
will  be  of  so  nearly  equal  importance  in  aiding  him  to  produce 
consumable  goods  that  he  will  be  conscious  of  no  tendency  to 
diminishing  returns.  After  a  while,  however,  when  his  rough 
equipment  of  capital  goods  is  fairly  complete,  he  will  have  to 
weigh  in  his  mind  the  advantages  of  adding  duplicate  goods  of 
some  kinds  or  of  substituting  better-made  goods  for  others 
already  in  his  possession.  At  this  point  his  expenditure  of 
effort  in  making  capital  goods  and  his  patience  in  waiting  until 
these  efforts  bear  fruit  in  consumable  products  will  be  less 
richly  rewarded  than  before.  One  bow  added  enormously  to 
his  ability  to  provide  himself  with  food,  a  second  of  a  little  dif- 
ferent kind  will  add  also  to  the  ease  and  certainty  with  which 
he  can  secure  game,  but  in  a  lessened  degree.     A  third  bow 


The  Law  of  Diminishing  Returns       129 

could  perhaps  be  used  advantageously,  but  the  added  game 
ascribable  to  it  would  probably  barely  reward  the  effort 
involved  in  its  production.  In  this  case  the  producfiveness  of 
Crusoe's  labour  is  increased  by  each  successive  addition  to  his 
capital,  but,  after  a  certain  point  has  been  passed,  this  increase 
is  at  a  diminishing  rate. 

The  position  of  an  industrial  society  as  regards  the  use  of 
capital  goods  is  not  materially  different  from  that  of  an 
isolated  producer.  If  the  number  of  its  workmen  is  stationary, 
while  their  equipment  of  capital  is  being  constantly  added  to, 
the  productiveness  of  its  industry  may  increase  for  an  indefi- 
nite period  with  every  addition  to  its  capital,  but  this  increase 
will  be  at  a  diminishing  rate.  The  fixed  labour  force  may 
be  thought  of  as  analogous  to  a  limited  supply  of  land.  In 
each  case  the  addition  of  successive  increments  of  capital  adds 
to  the  size  of  the  product,  but,  after  a  certain  point  has  been 
passed,  the  addition  is  only  at  a  diminishing  rate.  The  inven- 
tion of  new  and  more  efficient  forms  of  capital  goods  may  post- 
pone the  period  when  the  law  of  diminishing  returns  will  begin 
to  operate  as  regards  either  land  or  labour,  but  this  in  no  wise 
lessens  its  importance  as  one  of  the  far-reaching  tendencies  of 
which  economics  must  take  account. 

That  the  same  law  applies  to  capital  becomes  evident  when  Also  Capital 
it  is  considered  what  would  result  if  its  supply  were  fixed 
while  successive  additions  were  being  made  to  the  working 
population.  With  every  increase  in  the  number  of  workmen, 
it  would  be  necessary  to  utilise  the  available  tools,  machines, 
etc.,  more  intensively.  For  a  time  this  might  be  done  without 
any  tendency  towards  diminishing  returns,  but  this  could  not 
be  the  case  indefinitely.  Sooner  or  later,  as  bare-handed  work- 
men continued  to  be  added,  the  fixed  fund  of  capital  would 
show  diminishing  returns  just  as  did  the  fixed  labour  force 
when  the  conditions  were  reversed. 

That  diminishing  returns  must  after  a  time  result  from  either 
situation  is  really  a  corollary  from  the  principle  that  the  most 
effective  co-operation  between  labour  and  capital  is  only 
realised  when  they  stand  in  the  right  quantitative  relation  to 
one  another.  If  after  this  relation  has  been  established,  capital 
goods  increase  while  the  number  of  workmen  remains  fixed,  or 


Methods 
of  Accumu- 
lating 
Capital 


Saving  and 
Investing 


Borrowing 

and 

Investing 


130        Production:  Labour  and  Capital 

workmen  increase  while  capital  goods  remain  unchanged,  the 
co-operation  between  them  must  be  rendered  less  effective,  or, 
what  is  the  same  thing,  diminishing  returns  must  be  accepted 
as  the  reward  of  such  co-operation.  If  both  factors  increase 
together  there  will  be  no  occasion  for  any  reduction  in  the 
return  so  long  as  new  land  equal  in  quality  to  the  old  is  avail- 
able. It  is  therefore  not  the  increase  in  the  factor  whose  sup- 
ply is  being  added  to  alone  that  causes  the  diminution,  but  that 
increase  coupled  with  the  lack  of  response  on  the  part  of  the 
other  factor. 

§  J2i-  The  only  method  by  which  Crusoe  could  acquire  new 
capital  was  by  applying  his  own  efforts  to  its  creation.  He 
must  produce  it  as  well  as  save  it.  In  industrial  society  the 
production  of  capital  goods  is  effected  like  the  production  of 
consumable  goods  usually  through  the  agency  of  business 
managers  who  produce  for  the  market.  The  "  saving  "  which 
inspires  this  production  is  performed  by  a  different  set  of  people 
conveniently  designated  as  capitalists.  A  few  illustrations  will 
serve  to  show  how  the  savings  of  capitalists  help  to  bring 
capital  goods  into  existence : 

I.  A  farmer  who  wishes  to  enlarge  his  barn  saves  part  of 
the  money  he  receives  for  his  crop  and  uses  it  to  buy  lumber 
and  to  hire  masons  and  carpenters  to  make  the  desired  im- 
provement. In  this  case  by  buying  lumber  he  encourages  the 
production  of  more  lumber,  or  virtually  hires  lumbermen,  saw- 
mill hands,  etc.,  to  produce  this  kind  of  capital  good,  just  as  he 
subsequently  hires  men  to  convert  it  into  a  new  wing  to  his 
bam.  He  turns  over  to  others  his  command  over  society's 
wealth,  which  they  use  to  satisfy  their  wants.  In  return  he  re- 
ceives the  addition  to  his  barn,  a  new  capital  good  added  to 
society's  productive  equipment. 

II.  Very  often  the  farmer  who  wants  a  larger  barn  is  un- 
willing or  unable  to  save  enough  to  pay  for  it  himself.  If  l»e  is 
a  man  of  enterprise  he  is  not  likely  to  be  deterred  by  this  cir- 
cumstance from  taking  steps  to  obtain  it.  Having  a  valuable 
farm  to  pledge  as  security,  he  is  in  a  favourable  position  to  bor- 
row. He  may  apply  to  a  well-to-do  neighbour  who  has  saved 
the  money  needed  out  of  his  income  and  is  looking  for  a  chance 
to  invest  it.     In  this  case  the  neighbour  does  tlie  saving  and 


Borrowing'  and  Investing  131 

thereby  makes  possible  the  buildins?  of  the  addition  ;  the  farmer 
decides  how  the  saved  income  shall  be  invested  in  a  concrete 
form  of  capital,  taking  all  the  risk  of  the  venture  and  insuring 
the  lender  against  loss  by  pledging  or  mortgaging  his  farm. 
The  actual  creation  of  the  addition  results  as  before  from  the 
labour  of  woodchoppers,  mill  hands,  and  carpenters,  who  are 
paid  for  their  services  as  they  render  them. 

III.  Instead  of  applying  to  a  neighbour  the  modern  farmer  Borrowing 
who  wishes  to  borrow  money  is  more  likely  to  apply  to  a  bank,  '^"'^  ^°  ^ 
an  institution  which  receives  on  deposit  individual  savings  and 
lends  them  together  with  its  own  capital  and  its  credit  to  cus- 
tomers. In  this  third  and  most  typical  case,  the  saving  of  in- 
come is  performed  by  the  depositors  of  the  bank,  who  know 
nothing  about  the  ultimate  disposition  of  their  savings.  The 
lending  is  performed  by  trained  men  who  give  all  their  time 
and  thought  to  this  business,  the  bank  ofificers,  and  the  invest- 
ing or  conversion  of  the  purchasing  power  into  capital  goods 
is  done  as  before  by  the  farmer. 

In  these  ways  and  in  others  too  similar  to  require  separate  Borrowing 
description  the  accumulation  of  capital  goods  results  from  sav-  '^"^ 

Alwivs  for 

ing.  Not  all  saving,  however,  leads  to  an  increase  of  capital,  investment 
The  deposits  in  a  bank  may  be  loaned  to  someone  who  wishes 
to  spend  them  for  consumable  goods.  In  such  a  case,  what 
depositors  abstain  from  spending,  borrowers  spend,  and  the 
community's  stock  of  capital  remains  as  it  was  before.  In 
order  to  cause  an  increase  in  capital,  saving  must  be  supple- 
mented by  investing,  unless,  indeed,  it  takes  the  fonn  of  hoard- 
ing, which  is  unusual  in  modern  communities. 

In  the  above  illustrations  "  money  "  or  "  income  "  is  spoken  ^^P'|^' 
of  as  the  thing  "  saved."     Money  is,  of  course,  merely  the  Money 
medium  by  means  of  which  control  over  one  kind  of  wealth  ^^""'^^ 
which  the  individual  does  not  want  is  exchanged  for  control 
over  another  kind  which  he  docs  want.     What  is  really  saved 
in  every  case  is  the  capital  goods  themselves  which  are  brought 
into  existence  directly  or  indirectly  by  the  investment.     Thus 
in  the  examples  the  addition  to  the  barn  is  saved  and  added  to 
society's  capital  equipment. 

Often  investment  is  thought  of,  especially  in  cities,  as  buying 
real  estate,  or  stocks  or  bonds.     Such  purchases  are  invest- 


Buying 

Stocks  and 
BondsDoes 
not  Add  to 
Capital 


Kinds  of 

Capital 

Goods 


Land  and 
Capital 


132         Production:  Labour  and  Capital 

ments  from  the  point  of  view  of  the  individual,  but  to  the  com- 
munity as  a  whole  they  represent  simply  transfers  of  owner- 
ship over  capital  goods  already  in  existence.  The  investment 
proper  appears  when  the  purchasing  power  exchanged  for 
stocks  or  bonds  is  used  for  the  development  of  some  new  or  for 
the  better  equipment  of  some  old  enterprise.  Just  as  money 
deposited  in  a  bank  may  never  lead  to  any  real  addition  to 
capital,  so  money  invested  in  stocks  or  bonds  may  finally  be 
spent  for  consumable  goods  and  leave  no  trace  behind. 

§  74.  Capital  goods  may  be  defined  as  products  of  past  in- 
dustry used  as  means  not  to  the  direct  satisfaction  of  wants 
(consumption  goods),  but  to  further  production.  They  include 
all  the  intermediate  products  which  figure  in  roundabout  or 
capitalistic  production.  The  principal  kinds  of  capital  goods 
are: 

( 1 )  Permanent  improvements  in  the  physical  environment, 
in  the  form  of  drainage  systems,  canal  excavations,  tunnels, 
roadbeds,  etc. 

(2)  Buildings  of  all  kinds  except  those  serving  no  indus- 
trial purpose. 

(3)  The  rolling  stock  of  railways,  vehicles,  etc.,  not  used 
merely  for  pleasure. 

(4)  Tools  and  machinery. 

(5)  Farm  and  draft  animals. 

(6)  Seed,  raw  materials,  and  partially  finished  goods  in 
process  of  production. 

(7)  Finished  goods  in  the  hands  of  dealers. 

(8)  Money. 

In  connection  with  "  permanent  improvements  "  a  difficulty 
is  encountered  that  has  caused  no  little  confusion.  Land  as  a 
gift  of  nature  is  not  regarded  as  a  capital  good.  But  perma- 
nent improvements  in  land  become  for  practical  purposes  por- 
tions of  the  land  itself.  Thus  in  old  countries  most  land  is 
partly  a  gift  of  nature  and  partly  a  capital  good  and  it  is  often 
impossible  to  distinguish  between  the  two.  A  simple  way  out 
of  this  difficulty  is  to  describe  land  also  as  a  capital  good,  and 
this  is  done  by  the  business  community  and  by  some  econo- 
mists. To  the  writer  simplicity  so  secured  seems  bought  at  too 
high  a  price,  since  it  involves  a  disregard  of  the  distinction,  be- 


Dealers'  Stocks  are  Capital  133 

lieved  to  be  fundamental,  between  man's  part  in  production  and 
nature's  part.  A  better  plan  seems  to  be  to  accept  the  difficulty 
as  inevitable  and  to  recognise  that  in  distinguishing  between 
what  is  and  what  is  not  capital,  economists  have  the  same  sort 
of  task  as  confronts  biologists  in  distinguishing  between  what 
is  animal  and  what  is  vegetable.  As  regards  most  things 
classification  in  both  instances  is  easy. 

Along  the  same  line  is  the  temptation  to  include  as  capital  Acquired 
goods,  skill  and  training  that  have  been  acquired  as  the  results  capital  °° 
of  "  investments  in  education."  From  one  point  of  view  such 
acquired  aptitudes  for  production  should  be  included.  Their 
origin,  so  far  as  motives  are  concerned,  is  similar  to  that  of 
other  capital  goods.  IMoreover,  like  other  capital  goods  they 
are  aids  to  further  production.  Yet  economists  generally  de- 
cide against  such  inclusion  because  they  deem  it  important  to 
distinguish  sharply  between  man  and  the  material  aids  he  uses 
in  production.  On  the  whole  it  seems  best  to  adhere,  in  the 
present  treatise,  to  this  plan  of  classification. 

Objection  is  sometimes  made  to  the  inclusion  of  "  finished  Dealers' 
goods  in  the  hands  of  dealers  "  in  the  list  of  capital  goods.  Capital 
But  this  follows  logically  from  the  principle  (which  has  already 
been  defended)  that  trade  is  a  branch  of  production.  An  im- 
portant requisite  to  the  efficiency  of  production  is  a  regular  and 
continuous  ministering  to  the  w^ants  of  consumers.  J\Iost  eco- 
nomic goods  must  be  forthcoming  regularly  from  day  to  day 
or  at  particular  periods  in  order  to  possess  high  utility.  To 
secure  this  result  the  business  organisation  of  society  must 
provide,  first,  for  the  carrying  over  of  stocks  of  goods,  such  as 
agricultural  products  that  mature  only  periodically  but  that  are 
needed  continuously,  and,  second,  for  the  carrying  of  sufficient 
supplies  of  goods  that  mature  continuously,  to  insure  a  con- 
tinuous stream  of  commodities  from  producers  to  consumers, 
no  matter  how  far  they  may  be  removed  from  each  other. 
Thus  wheat  protluction  is  efficient  in  proportion  to  the  care 
with  w^hich  the  crop  harvested  during  the  summer  months  is 
handled  so  as  to  meet  the  community's  need  for  bread  during 
the  entire  year.  All  of  the  conveniences,  such  as  elevators, 
warehouses,  etc.,  which  oontribute  to  this  end,  as  well  as  the 
stored  wheat  itself,  are  capital  goods.     In  the  same  way  if  it 


Money 


Progress  in 
(Capitalistic 
Production  ; 
Tlie  Middle 
A.tres 


The 

Growth  of 
Commerce 


Influence 
of  the 
Industrial 
Revolution 


134        Production:  Labour  and  Capital 

takes,  on  the  average,  thirty  days  to  transport  bananas  from  the 
growers  in  Central  America  to  consumers  in  American  cities  it 
is  indispensable  to  the  efficient  production  of  this  fruit  that  a 
stock  equal  at  least  to  thirty  days'  consumption  be  kept  regu- 
larly in  transit  either  in  the  warehouses  of  shippers,  on  the 
ocean,  in  the  warehouses  of  wholesale  dealers,  or  ripening  in 
the  shops  of  retail  venders.  Such  a  stock  is  a  part  of  the  com- 
munity's capital  goods. 

The  last  kind  of  capital  good  enumerated,  "  money,"  is  too 
important  to  be  dismissed  with  a  few  words  and  is  therefore 
treated  in  separate  chapters. 

§  75.  The  development  of  capitalistic  production  to  anything 
like  its  present  proportions  is  of  comparatively  recent  date. 
During  the  Middle  Ages  the  capital  goods  used  were  so  few 
and  crude  that  each  producer  supplied  himself  with  his  needed 
equipment  without  great  difficulty.  Instead  of  commanding 
interest  the  accumulated  wealth  of  the  rich  had  often  to  be 
stored  and  a  fee  paid  for  its  safe-keeping. 

As  commerce  developed  there  was  an  increasing  demand  for 
capital  in  the  form  of  vessels  and  goods  with  wdiich  to  stock 
them,  and  merchants,  like  Antonio  in  The  Merchant  of  Venice, 
were  often  able  to  turn  other  people's  accumulations  to  very 
profitable  account.  The  use  of  tools  and  machinery  in  agri- 
culture and  manufacturing  made  little  advance,  however,  be- 
fore the  period  of  the  industrial  revolution.  During  all  these 
centuries  the  chief  service  of  saving  with  a  view  to  the  future 
was  in  connection  with  the  preservation  of  flocks  and  herds  and 
the  husbanding  of  the  food  supply  and  seed  from  one  harvest 
to  the  next  and  from  years  of  abundance  to  the  lean  years  that 
were  sure  sooner  or  later  to  follow. 

Since  the  beginning  of  the  last  century  capitalistic  produc- 
tion has  advanced  in  the  Western  World  by  leaps  and  bounds. 
In  place  of  simple  hand  tools  and  foot  and  horse-power 
machines,  complex  machines  to  be  driven  by  water,  steam,  or 
electrical  power  have  come  into  use.  These  have  been  multi- 
plied so  rapidly  that  the  average  capital  equipment  of  the 
modern  producer  is  easily  a  hundredfold  larger  than  that  of  the 
mediaeval  workman.  Enormous  investments  have  been  made 
also  in  improved  transportation  facilities  and  in  buildings  for 


Coiiclusion  135 

the  safe  housing  of  machinery,  operatives,  and  goods.  As  a 
result  of  this  progress  in  capitahstic  production  and  of  the 
contemporaneous  discovery  and  invention  of  new  and  more 
efficient  kinds  of  capital  goods,  the  productiveness  of  human 
industry  has  been  immensely  increased,  A  large  part  of  this 
increased  return  goes  as  interest  to  those  who  allow  their 
wealth  to  remain  in  the  form  of  capital  in  preference  to  con- 
verting it  into  consumable  goods  for  the  gratification  of  their 
immediate  wants.  The  part  that  remains  as  the  wages  of 
labour  has  also  grown,  however,  so  all  classes  have  derived 
material  benefit  from  the  change. 

§  76.  In  this  chapter  the  circumstances  determining  indi-  Summary 
vidual  capacity  and  the  nature  and  results  of  capitalistic 
production  have  been  considered.  It  has  been  shown  that  the 
latter  involves  "  abstinence,"  "  saving,"  and  "  waiting,"  in 
addition  to  the  mere  mechanical  production  of  capital  goods, 
and  it  has  been  implied  that  these  are  the  grounds  for  the  pay- 
ment of  interest  to  those  who  embark  their  wealth  in  indus- 
trial enterprises.  The  different  kinds  of  capital  goods  have 
been  distinguished,  and  finally  the  progress  of  capitalistic  pro- 
duction has  been  traced  and  its  advantages  indicated. 

Since  capitalistic  processes  add  so  largely  to  the  productive-  Conclusion 
ness  of  industry,  the  development  of  thrift,  or  a  willingness  to 
forego  present  gratifications  for  the  sake  of  the  future,  is  an  im- 
portant condition  to  further  progress.  What  is  most  needed 
is  not  a  general  development  of  thrift,  for  many  individuals 
are  already  inclined  to  carry  saving  to  the  point  of  parsimony, 
but  a  development  of  it,  or  of  the  prudence  and  forethought  on 
which  it  depends,  among  the  working  classes.  Accustomed 
for  generations  to  live  from  hand  to  mouth,  wage-earners  are 
only  just  beginning  to  appreciate  how  much  the  accumulation 
of  property  may  contribute  to  their  well-being.  Its  principal 
advantage  for  them,  individually,  is  that  it  will  serve  to  carry 
them  over  periods  of  unemployment  without  that  loss  in  effi- 
ciency that  is  the  most  pitiful  result  of  enforced  idleness  for 
men  who  have  nothing  to  fall  back  upon.  For  the  whole  com- 
munity the  aggregate  savings  of  a  thrifty  labouring  popula- 
tion would  cause  a  groat  increase  in  its  equipment  of  capital 
goods,    and    a   corresponding   improvement    in    its   industrial 


136       Production:  Labour  and  Capital 

processes.  On  both  accounts  the  development  of  providence 
and  forethought  among  the  masses  is  earnestly  to  be  desired. 
Equally  important  are  improvements  in  the  conditions  of  wage- 
earners  which  will  encourage  them  to  save  by  rendering  spend- 
ing up  to  the  full  limit  of  their  incomes  less  imperatively 
necessary. 

REFERENCES  FOR   COLLATERAL  READING 

Walker,  VoViWcaX  Economy,  Part  II.,  Chaps.  II.  and  III.;  ^Marshall, 
Principles  of  Economics,  Book  IV.,  Chaps.  VII.,  VIII.,  and  IX.; 
*Bohm-Bawerk,  The  Positive  Theory  of  Capital,  Books  I.  and  II.; 
*Clark,  The  Distribution  of  Wealth,  Chaps.  IX.,  X.,  and  XL; 
Nicholso7i,  Principles  of  Political  Economy, Vol.  I.,  Book  I.,  Chaps. 
V.  and  VI.;  *Ptersoti,  Principles  of  Economics,  Vol.  I.,  Part  I., 
Chap.  IV.;  *  Fetter,  Principles  of  Economics.  Chaps.  9,  20,  and  22; 
*Carver.  The  Distribution  of  Wealth,  Chap.  II. 


CHAPTER  VIII 

PRODUCTION:    CO-OPERATION    AND   BUSINESS 
ORGANISATION 

§  yy.  Important  as  is  an  individual's  capacity  as  a  condition  Co-opera 
determining  his  productive  efficiency,  the  way  in  which  he  j'°J^  ^" 
co-operates  with  his  fellows  is  even  more  essential.  Alone,  a 
man  can  do  little  more  than  keep  himself  alive  even  in  the 
most  favourable  environment.  Working  in  co-operation  with 
others  he  so  multiplies  the  results  of  his  toil  that  he  may,  if 
other  conditions  be  favourable,  provide  himself  with  comforts 
and  luxuries  as  well  as  with  necessaries. 

Three  varieties  of  co-operation  may  be  distinguished :  ( i )  Varieties 
Simple  co-operation,  that  is,  the  simple  working  together  of  operation 
several  for  the  attainment  of  a  common  purpose,  as  when  sev- 
eral unite  to  move  a  stone  or  raise  a  mast.  (2)  The  division  of 
employments,  by  which  each  gives  his  entire  time  to  some  one 
branch  of  production,  such  as  farming,  boat-building,  or  shoe- 
making,  and  exchanges  his  products  for  the  products  of  others. 
This  is  commonly  described  as  the  simple  division  of  labour. 
It  is  an  indirect  form  of  co-operation  in  that  in  realising  it  men 
work  together  not  at  the  same  but  at  different  tasks,  expecting 
to  share  their  unlike  products  by  means  of  exchange.  (3) 
The  subdivision  of  tasks  in  each  employment,  as  when  in  shoe- 
making  one  makes  the  soles,  another  the  uppers,  another  com- 
bines them,  etc.  This  may  be  conveniently  designated  as  the 
complex  division  of  labour  and  is  the  characteristic  of  the  fac- 
tory system.     As  co-operation  it  also  is  indirect. 

Progress  in  indirect  co-operation,  or  the  division  of  labour,  Depena- 
depends  upon  the  development  of  markets  and  other  facilities  ^"'^^  °?  ^^ 
for  exchange.     For  example,  a  man  cannot  be  a  shoemaker  on  Devel- 
unless  shoes  are  in  demand  by  people  willing  and  able  to  pay  ^l'"^5"5  °^ 
for  them.     Much  less  can  a  shoe  factory  be  organised,  with  its 
elaborate  subdivision  of  tasks  and  large  output,  unless  shoes 

137 


The 

Influenceof 
Improved. 
Transpor- 
tation 
Facilities 


138  Production:  Co-operation  and  Organisation 

can  be  sold  at  remunerative  prices.  From  this  it  may  be  in- 
ferred that  every  improvement  tending  to  widen  the  market 
for  goods  is  favourable  to  a  further  extension  of  the  division  of 
labour.  The  truth  of  this  conclusion  is  abundantlv  illustrated 
by  the  history  of  the  last  one  hundred  years. 

Before  the  era  of  steam  railways  and  steam  vessels  the 
market  for  most  products  was  necessarily  restricted  to  limited 
areas  near  the  source  of  supply  because  of  the  high  cost  of 
transportation.  Each  region  had  to  produce  for  itself  its 
bulkier  food  articles,  building  materials,  and  implements,  and 
could  import  from  or  export  to  other  regions  only  those 
products  which  were  light  and  costly.  Under  these  circum- 
stances the  division  of  labour  could  be  little  practised.  Coun- 
try districts  afforded  employment  to  a  blacksmith,  a  carpenter, 
and  a  few  other  specialists.  A  few  cities  grew  up  where  those 
goods  which  could  pay  the  relatively  high  costs  of  transporta- 
tion were  manufactured.  But  the  majority  of  the  people  were 
forced  by  the  conditions  to  give  their  attention  to  agriculture 
as  the  only  means  by  which  they  could  earn  a  living.  Steam 
and,  more  recently,  electrical  transportation  have  changed  this 
situation.  At  present  the  cost  of  carriage  offers  no  serious 
obstacle  to  the  shipment  of  even  cheap  and  bulky  articles,  such 
as  wheat  and  coal,  half-way  round  the  world.  For  most  goods, 
in  place  of  a  merely  local  market,  there  are  now  general 
markets  ranging  in  magnitude  from  that  afforded  by  a  large 
city  to  that  of  the  whole  world.  Perishable  goods,  services, 
and  goods  for  which  there  is  only  a  local  demand,  must  still 
be  produced  on  a  small  scale  to  satisfy  local  requirements, 
but  the  proportion  of  these  goods  to  the  whole  mass  of  prod- 
ucts is  constantly  diminishing.  Even  fruit  and  fresh  meat  have 
ceased  to  be  perishable  in  the  sense  that  they  wnll  not  bear  trans- 
portation to  distant  markets.  Accompanying  this  widening  of 
markets  there  has  been  a  concentration  of  special  industries  in 
special  localities  and  of  business  management  in  fewer  and 
fewer  hands.  In  this  way  full  advantage  has  been  taken  of 
opportunities  for  extending  the  division  of  labour,  with  the 
result  that  the  volume  of  goods  produced  has  enormously 
increased. 

§  78.  Capacity    to   co-operate    depends    upon    certain    well- 


The  Advantages  of  Co-operation        139 

defined  qualities  as  much  as  does  individual  capacity  to  pro-  Qualities 
duce.     Of  these  qualities  the  principal  are:  (i)  honesty,  (2)  to  Effective 
steadiness,  (3)  a  spirit  of  conciliation,  (4)  ready  obedience  to  Co-opera- 
superiors,  and  (5)  organising  ability.    The  first  four  are  neces- 
sary to  the  mass  of  men  and  will  be  considered  here,  the  last  is 
necessary  chiefly  to  those  who  assume  the  task  of  industrial 
leadership  and  will  be  considered  in  a  subsequent  section. 

Honesty  is  indispensable  to  mutual  trust,  and  co-operation 
cannot  be  carried  far  unless  men  trust  one  another.  Steadiness 
is  necessary,  because  without  it  a  complex  division  of  labour 
would  be  wasteful  rather  than  economical.  When  tasks  are 
subdivided  the  performance  of  each  successive  one  depends 
upon  the  performance  of  the  preceding.  Unless  all  or  nearly 
all  the  workmen  in  a  factory  are  present  at  the  same  hours  each 
day  the  whole  process  is  disturbed.  A  spirit  of  conciliation  is 
necessary  because  working  together  involves  being  together, 
and  this  entails  constant  friction  unless  each  is  willing  to  make 
concessions.  Finally,  ready  obedience  to  superiors  is  essential 
to  the  success  of  a  complex  division  of  labour,  because  this  in- 
volves planning  by  one  set  of  people  and  execution  by  another. 

These  qualities  are  fostered  by  the  very  division  of  labour  to  Such 
which  they  are  necessary.     In  other  words,  those  peoples  who  Developed 
have  been  accustomed  to  the  division  of  labour  longest  have  by  Co-nper- 
them  most  highly  developed,  while  those  who  have  only  known  ^  ^^°     ^^ 
isolated  production  are  usually  lacking  in  some  if  not  in  all  of 
them.     From  this  it  results  that  the  introduction  of  a  division 
of  labour  into  a  new  region  is  particularly  difficult,  while  its 
extension  after  it  has  once  been  established  becomes  increas- 
ingly easy.     The  disciplinary  value  of  a  complex  division  of 
labour  is  clearly  shown  by  the  contrast  between  an  industrial 
and  an  agricultural  population.     The  former  is  steadier  and 
more  social,  w^hile  the  latter  is  more  independent  and  self- 
reliant. 

§  79.  Considering  the  three  forms  of  co-operation  with  The  Ad- 
reference  to  the  services  which  they  render  to  production  the  ^'^ntages 
following  distinct  advantages  may  be  claimed  for  them :  operation 

(i)  Men  working  together,  as  in  the  building  of  the 
pyramids,  can  do  things  which  men  working  singly  could  not 
possibly  do. 


The  Disad- 
vantages 
of  Co- 
operation 


140  Production:  Co-operation  and  Organisation 

(2)  By  simplifying  the  work  of  each  man,  a  division  of 
labour  shortens  the  time  needed  to  master  a  trade.  In  place  of 
the  seven  years'  apprenticeship  once  necessary,  modern  methods 
of  production  call  for  but  a  few  months'  special  training  for 
most  positions. 

(3)  The  division  of  labour  ofifers  a  varied  field  for  indus- 
trial activity  and  thus  enables  each  man  with  special  aptitude 
or  talent  to  devote  his  entire  time  to  the  work  for  which  he  is 
best  fitted. 

(4)  By  reducing  the  labour  of  each  man  to  a  few  simple 
motions  the  complex  division  of  labour  is  favourable  to  the 
acquisition  of  great  dexterity.  Hand  and  eye  come  to  act 
almost  automatically  and  with  a  quickness  and  accuracy  unat- 
tainable by  a  man  constantly  varying  his  task. 

(5)  The  same  simplification  and  concentration  of  effort  is 
favourable  to  the  progress  of  invention.  When  work  is  so 
subdivided  that  each  hand  makes  but  two  or  three  simple 
motions,  the  time  is  ripe  for  the  invention  of  a  machine  to  take 
the  place  of  labour.  Thus  the  goal  towards  which  the  division 
of  labour  is  ever  tending  is  the  invention  of  labour-saving 
machinery. 

(6)  Co-operation  permits  the  most  economical  use  of  land 
and  natural  forces.  Each  section  may  be  devoted  to  the  pro- 
duction of  that  particular  good  for  which  it  is  best  fitted  just 
as  each  man  may  devote  his  time  to  his  chosen  specialty.  This 
is  called  the  territorial  division  of  labour  and  is  increasingly 
important  as  improvements  are  made  in  methods  of  transport- 
ing goods  from  the  place  of  production  to  that  of  consumption. 

§  80.  Against  these  advantages  of  co-operation  must  be 
weighed  one  decided  disadvantage.  Specialisation  is  narrow- 
ing. If  it  requires  a  man  to  work  long  hours  with  his  muscles 
it  is  likely  to  cut  him  ofif  from  opportunities  to  develop  his 
mind.  On  the  other  hand,  if  it  limits  him  to  an  intellectual  pur- 
suit it  is  likely  to  deprive  him  of  the  vigorous  exercise  needed 
by  his  muscular  system.  Specialisation  is  inimical  to  that  all- 
round  development  of  character  and  capacity  which  is  the 
natural  consequence  of  varied  interests  and  varied  pursuits. 
Carried  to  excess  it  unfits  men  for  the  enjoyment  of  that  very 
wealth  which  it  helps  them  in  such  large  measure  to  secure. 


Other  Considerations  141 

Even  from  the  point  of  view  of  production,  however,  excessive 
specialisation  does  not  always  result  in  increased  productive 
power.  In  a  world  in  which  goods  and  processes  are  con- 
stantly changing  special  proficiency  in  any  given  line  of  work 
may  at  any  time  be  superseded.  When  it  is  acquired  at  the 
expense  of  general  development  it  often  leaves  its  possessor 
actually  worse  off  than  he  would  have  been  without  it.  No 
group  among  the  unemployed  is  so  hopeless  as  the  highly 
skilled  artisans  for  whose  skill  the  industrial  world  has  ceased 
to  have  a  use. 

In  giving  full  weight  to  this  disadvantage  it  must  not  be  Other  Con- 
overlooked  that  co-operation,  especially  as  it  is  developed  in  ^'  ^^^  '"^^^ 
connection  with  the  factory  system,  serves  to  bring  specialists 
together  and  give  them  the  benefit  of  social  intercourse  which 
the  isolated  producer  sadly  misses.  Those  who  labour  in  fac- 
tories describe  the  social  aspects  of  their  work  as  in  large 
measure  compensating  them  for  the  monotony  of  their  simple 
tasks.  If  increased  leisure  could  be  added  to  the  interchange  of 
ideas  which  the  factory  permits,  the  evils  of  specialisation 
would  be,  if  not  entirely  eradicated,  at  least  reduced  to  a 
minimum. 

§81.  It  is  not  easy  to  show  in  a  statistical  way  how  much  Methods 

the  world  owes  to  progress  in  co-operation  and  the  division  of  °,^  Gauging 

labour.     An  important  incident  of  this  progress  has  been,  as  vantages 

alreadv  suggested,  the  invention  of  machinerv  to  take  the  place  °^  ^°:  • 

'  .   ,.      ,  ,  •       ,  '  operatioa 

of  specialised  labourers,  and  in  those  cases  where  the  division 

of  labour  has  been  carried  furthest  machinery  now  plays  such 
a  large  part  that  it  is  iinpossible  to  decide  what  share  of  the 
productive  result  should  be  credited,  historically,  to  each. 
One  of  the  best  ways  to  get  an  impression  of  the  industrial 
results  of  the  division  of  labour  is  to  compare  the  work  of  a 
hand  shoemaker,  which  may  still  be  observed  in  many  parts 
of  the  United  States,  with  that  performed  in  a  well-organised 
shoe  factory.  According  to  an  investigation  made  by  the 
United  States  Department  of  Labour,  the  number  of  distinct 
processes  into  which  the  manufacture  of  men's  brogan  shoes 
is  now  divided  is  eighty-four.  Many  of  these  are  performed 
by  automatic  machines.  It  is  calculated  that  the  iMcKay  ma- 
chine for  attaching  the  soles  of  shoes  to  the  uppers  turns  out 


Statistics 
of  Pin- 
making  in 
1776  and 
To-day 


Progress 
Greatest 
in  Manu- 
facturing 


Business 
Organisa- 
tion 


142  Production :  Co-operation  and  Organisation 

in  one  hour  and  thirty-eight  minutes  one  hundred  pairs,  which 
it  would  take  ninety-eight  hours  to  sew,  and  twenty-five 
hours  even  to  peg,  by  hand.  From  1855  to  1895  the  efficiency 
of  labour  is  said  to  have  been  multiplied  five-fold  in  the  shoe 
industry  in  the  United  States  through  the  introduction  of  a 
division  of  labour  and  of  improved  machinery. 

In  Adam  Smith's  day  the  best  illustration  of  the  division  of 
labour  that  came  under  his  observation  was  that  used  in  the 
manufacture  of  pins.  He  showed  that  through  the  division  of 
labour  the  average  product  of  pins  to  each  hand  employed  in  a 
pin  factory  was  5000  per  day  and  contrasted  this  with  the  one 
crude  pin  a  day  which  a  single  artisan  might  perhaps  turn  out 
if  he  had  to  do  the  whole  work  by  himself.  At  present  pins 
are  manufactured  by  automatic  machinery  and  1,200,000  per 
workman  per  day  is  said  to  be  the  output  of  a  well-equipped 
factory.  The  progress  in  screw  making  is  even  more  remark- 
able. According  to  estimates  made  by  the  Department  of 
Labour  10,000  screws  are  now  made  by  an  expenditure  of  16.7 
minutes  of  human  labour  in  comparison  with  1250  hours  for- 
merly required  to  produce  the  same  number.  In  this  case  the 
increase  in  the  efficiency  of  labour  is  4491  fold. 

Similar  examples  of  progress  due  partly  to  the  division  of 
labour  and  partly  to  the  introduction  of  labour-saving  ma- 
chinery might  be  multiplied  for  every  branch  of  manufacturing. 
The  subject  has  been  exhaustively  treated  in  a  special  report  * 
issued  by  the  Department  of  Labour  and  this  may  be  consulted 
for  other  striking  illustrations  of  improvement.  On  the  whole 
it  is  not  too  much  to  say  that  the  efficiency  of  labour  in  manu- 
facturing has  been  increased  many  hundred  fold  by  the  aban- 
donment of  isolated  production  and  hand  processes  in  favour 
of  the  division  of  labour  and  machinery.  In  other  branches  of 
production  progress  has  been  less  remarkable  for  the  simple 
reason  that  they  are  less  well  adapted  to  these  improve- 
ments. 

§  82.  Business  organisation  has  been  carried  to  such  a  point 
in  modern  communities  that  few  persons  now  produce  for  them- 
selves the  things  that  they  require.  Even  in  country  districts 
the  typical  farmer  is  no  longer  the  pioneer  raising  food  and 
*  Report  of  1898  on  Hand  and  Macliine  Labour. 


Qualities  of  a  Good  Entrepreneur       143 

materials  for  his  family,  but  the  producer  for  the  market  who 
looks  to  the  market  for  most  of  the  things  that  he  needs.  We 
have  called  this  development  "  progress  in  co-operation,"  but 
it  is  evident  that  the  resulting  co-operation  is  not  deliberately 
planned  by  those  who  participate  in  it.  It  arises  spontaneously 
as  each  one  follows  his  own  interest  without  thought  of  his 
neighbour.  As  a  country  district  emerges  from  the  pioneer 
stage,  different  men  discover  that  it  pays  them  better  to  be 
specialists  and  to  produce  for  the  market  than  to  produce  for 
themselves.  Thus  a  simple  division  of  labour  is  introduced 
to  supplement  the  simple  co-operation  that  prevails  even  among 
birds  and  animals.  The  complex  division  of  labour  follows  in 
due  course  because  of  its  superior  effectiveness,  and  in  this  way, 
as  time  goes  on,  co-operative  production  displaces  isolated  and 
individual  production.* 

The  success  of  industrial  co-operation  depends  in  large  The  En- 
measure  upon  the  ability  of  business  managers,  or  enfrepre-  ^repreneur 
neiirs.  These  are  the  men  who  act  as  directors  of  industrial 
undertakings.  They  decide  what  shall  be  produced  and  how  it 
shall  be  produced.  They  hire  labourers  and  determine  what 
they  shall  do.  They  borrow  money  and  convert  it  into  par- 
ticular forms  of  capital  goods  or  exchange  it  for  land.  Finally, 
they  assume  the  risks  of  the  businesses  in  which  they  are  en- 
gaged, undertaking  to  pay  wages,  interest,  and  rent,  whether 
or  not  the  results  are  satisfactory. 

The  qualities  needed  by  an  entrepreneur  are  not  unlike  those  Qualities 
required  by  a  military  leader.     He  must  have  energy  and  enter-  ^  ^ ,  p 
prise.     He  must  be  a  good  judge  of  men  and  of  conditions,  trepreneur 
He  must  have  confidence  in  himself  and  be  able  to  inspire  con- 
fidence and  a  feeling  of  loyalty  in  others.     Above  all  he  must 
have  organising  ability,  that  is,  the  faculty  of  combining  men 
and  things  in  the  most  effective  way  for  the  realisation  of  a 
desired  result.     A  community  that  is  well  supplied  with  leaders 
having  these  qualities   is   sure   to  have   its   industrial   forces 
turned  to  good  account.     Its  labourers  will  be  assigned  the 

*  To  distinguish  this  spontaneous  or  competitive  co-operation  from 
the  co-partnership  of  workmen  in  the  management  of  industrial 
enterprises,  to  which  the  term  "  co-operation  "  is  frequently  applied, 
the  latter  is  referred  to  in  this  work  as  "  labour  co-partnership." 


144  Production:  Co-operation  and  Organisation 

special  tasks  for  which  they  are  best  fitted  so  far  as  conditions 
permit,  and  its  capital  will  take  the  form  of  the  capital  goods 
that  are  found  to  be  most  efficient.  Invention  and  discovery 
will  be  highly  appreciated  and  progress  in  the  technique  of 
production  will  be  rapid.  Even  a  few  capable  entrepreneurs 
may  secure  these  important  results  for  a  community.  They  serve 
the  public  not  only  by  organising  efficiently  the  special  branches 
of  industry  which  they  direct,  but  by  setting  standards  which 
less  able  men  are  only  too  glad  to  copy.  Thus  it  is  not  uncom- 
mon in  the  United  States  to  find  whole  towns  which  are  literally 
"  run  "  by  one  or  two  men.  The  same  men  acting  in  combi- 
nation are  coming  more  and  more  to  control  the  important  in- 
dustries of  the  whole  country,  and  this  gives  them  an  influence 
for  good  or  evil  that  can  scarcely  be  exaggerated.  The  greater 
the  power  of  these  directors  of  the  community's  industries,  the 
greater  the  importance  that  must  be  ascribed  to  personal  quali- 
ties in  determining  the  direction  of  industrial  development. 
This  importance  of  personality  as  a  factor  in  modern  business 
was  strikingly  illustrated  in  the  spring  of  1900  when  several 
English  investors  took  out  insurance  policies  on  the  life  of 
America's  leading  financier,  to  protect  themselves  in  case  the 
latter's  death  intervened  to  prevent  the  consummation  of  cer- 
tain gigantic  financial  projects  of  which  he  was  the  originator 
and  guiding  spirit. 
The  §  8^.  The  simplest  form  of  business  organisation  is  that  in 

trepreneui-    which  a  single  entrepreneur  controls  the  whole  enterprise.     He 
System  ^lay  do  everything  for  himself  and  use  only  his  own  capital,  as 

do  usually  doctors,  lawyers,  cobblers,  etc.,  or  he  may  employ 
hired  workmen  and  borrowed  capital.  In  the  United  States 
many  businesses  employing  thousands  of  men  and  using  mil- 
lions of  capital  have  grown  up  under  the  responsible  manage- 
ment of  single  individuals.  The  advantages  of  such  a  one- 
man  organisation  are  obvious.  Its  disadvantages  are  that  one 
man,  however  able,  cannot  be  equally  competent  to  direct  all 
departments  of  a  large  and  complex  business  and  that  the 
capital  that  one  man  can  command  is  small  in  comparison  with 
that  which  may  be  secured  by  a  number  of  men  associated 
together. 

These  disadvantages  are  partially  overcome  in  a  second  form 


Advantag-es  of  the  Corporation  145 

of  business  organisation,  the  partnership.  A  partnership  is  an  The  Part- 
association  of  two  or  more  indiv^iduals  who  are  jointly  and  ^ 
severally  responsible  for  the  management  of  the  enterprise  in 
which  they  are  embarked.  On  forming  a  partnership  *  the 
partners  become  individually  liable  for  all  of  the  obligations  of 
the  firm  and  agree  that  any  contract  entered  into  by  either 
partner  in  the  firm's  name  shall  be  binding  on  all.  This  form 
of  organisation  is  well  fitted  for  businesses  calling  for  a  diver- 
sity of  talents  and  requiring  no  more  capital  than  a  small  num- 
ber of  men  may  command.  Until  the  last  fifty  years  it  was  the 
common  form  of  organisation  for  businesses  that  had  outgrown 
individual  control.  Recently  it  has  given  way  quite  largely 
to  the  corporation,  the  third  important  form  of  business 
organisation. 

A  corporation  is  an  association  of  individuals  known  as  The  Cor- 
stockholders  who  are  empowered  by  legal  charter  to  elect  P'^^^^'o^ 
annually  a  board  of  directors  and  through  it  to  act  as  one  per- 
son in  the  conduct  of  the  specified  business.  Corporations 
enjoy,  usually,  perpetual  life.  They  may  sue  or  be  sued,  incur 
debts,  enter  into  contracts — in  short,  do  everything  necessary  to 
the  conduct  of  business,  within  the  limits  prescribed  by  their 
charters  of  incorporation,  as  though  they  were  individuals. 
The  liability  of  the  stockholders  in  corporations  is  limited 
usually  in  the  United  States  to  the  capital  actually  paid  in  or 
pledged  in  return  for  stock.  Sometimes,  as  in  the  case  of 
the  national  banks,  stockholders  are  further  liable  for  a 
sum  equal  to  the  par  value  of  the  stock  they  own,  but  this 
liability  is  never  unlimited  as  is  that  of  legally  constituted 
partners. 

§  84.  The  advantages  of  the  corporation  for  business  pur-  Advan- 
poses  are :  ( i )  It  continues  even  though  its  promoters  die  or  thf^Co^- 
retire  from  business.     (2)  It  draws  its  capital  in  large  or  small  poration 
quantities  from  widely  different  sources  and  may  command 
any  amount,  however  great,  for  an  enterprise  in  which  in- 
vestors have  confidence.     (3)  It  may  profit  by  the  intermittent 
attention  of  directors  whose  ability  and  experience  make  their 
services  of  the  greatest  value,  but  who  could  not  be  induced  to 

*  Limited-liability  partnerships  are  not  included  in  this  description 
because  they  have  become  an  unusual  type. 


Its  Disad- 
vantages : 
Diffused 
Responsi- 
bility 


146  Production:  Co-operation  and  Organisation 

assume  the  risks  incidental  to  partnerships.  (4)  It  is  flexible, 
permitting  a  complete  change  of  management  whenever  the 
stockholders  deem  this  expedient,  through  the  simple  process 
of  an  election  at  an  annual  meeting. 

These  considerations  and  others  of  less  importance  have 
caused  the  corporate  form  of  organisation  to  be  adopted  for  a 
great  variety  of  enterprises.  It  is  probably  within  the  truth 
to  say  that  two-fifths  of  the  business  of  the  United  States  is 
now  controlled  by  corporations  and  there  is  every  indication 
that  the  proportion  is  increasing.  This  makes  important  the 
recognition  of  certain  drawbacks  attaching  to  the  corporate 
form  of  organisation.  Chief  among  these  is  the  fact  that  re- 
sponsibility for  the  management  of  corporations  is  dififused. 
In  one-man  businesses  and  partnerships  the  men  who  organise 
and  manage  the  enterprises  are  the  ones  most  vitally  interested 
in  their  success.  In  corporations  the  stockholders,  who 
usually  furnish  all  or  the  greater  part  of  the  capital  required 
and  have  to  bear  the  loss  if  things  go  wrong,  entrust  their 
interests  to  the  board  of  directors.  The  board  of  directors  in 
turn  deputes  the  actual  management  of  the  business  to  a 
salaried  president  or  manager  who  may  not,  and  often  does  not, 
have  any  further  interest  in  the  business  than  that  his  reputa- 
tion depends  to  som^e  extent  upon  the  honesty  and  wisdom  with 
which  he  manages  it.  The  entrepreneur  function  is  thus 
divided  in  the  corporation  between  three  parties  no  one  of 
whom  has  the  same  vital  interest  in  the  business  that  the  single 
entrepreneur  or  partner  feels  in  businesses  conducted  on  the 
other  plans.  Moreover,  few  directors  or  managers  have  not, 
at  times,  private  mterests  in  conflict  with  the  corporate 
interests  they  are  supposed  to  promote.  This  diffusion  of  re- 
sponsibility and  of  interest  causes  corporate  management  to  be 
often  wasteful  and  sometimes  corrupt.  The  salaries  paid  are 
frequently  higher  than  they  need  be  to  secure  the  required 
grade  of  labour,  appointments  are  often  determined  by  personal 
rather  than  by  business  considerations,  and  inflated  prices  are 
often  paid  for  materials  in  consequence  of  the  fact  that  par- 
ticular directors  are  interested  in  their  production.  More  com- 
mon than  these  clear  violations  of  trust  are  misrepresentations 
in  regard  to  the  affairs  of  the  corporation  intended  to  influence 


Disregard  of  Public  Interest  147 

the  stock  market  and  to  enable  those  interested  to  carry  through 
some  deal  for  their  own  benefit. 

A  second  abuse  is  connected  with  the  borrowing  power  oi  Misuse  of 
corporations.  When  this  power  is  used  to  secure  money  by  i>o\^er 
means  of  a  sale  of  bonds  the  law  gives  to  bondholders  no  voice 
in  the  management  of  the  corporation  so  long  as  the  interest 
is  paid  and  the  principal  is  not  defaulted.  The  larger  the  pro- 
portion of  the  capital  required  for  any  enterprise  that  is  secured 
through  the  sale  of  bonds,  the  smaller  is  the  interest  in  the 
business  of  the  stockholders,  who  nevertheless  continue  to  con- 
trol it.  It  has  often  happened  in  connection  with  railway  cor- 
porations in  the  United  States  that  the  entire  capital  has  been 
secured  by  selling  bonds  and  that  the  stock  has  represented 
simply  a  bonus  paid  to  the  promoters  of  the  company.  This  is 
a  situation  fraught  with  danger,  as  American  experience  has 
abundantly  proved.  To  give  a  fictitious  value  to  their  stock 
promoters  are  only  too  apt  to  pay  dividends  out  of  earnings 
that  should  be  expended  for  renewals  and  replacements. 
Before  the  corporation  is  reduced  to  bankruptcy  they  can 
usually  sell  their  holdings  to  unsuspecting  investors  and 
retire,  leaving  to  the  latter  the  task  of  reorganising  the 
business. 

A  third  set  of  evils  has  reference  to  the  general  or  public  Disregard 
interest  in  corporations.  Individuals  in  their  pursuit  of  gain  '/'^^(.g"^^*^ 
are  controlled  by  the  moral  standards  of  their  business  asso- 
ciates. Corporations  have  no  moral  standards.  Their  di- 
rectors are  willing  to  wink  at  practices  on  the  part  of  the 
officials  they  appoint  to  which  they  would  not  themselves 
stoop.  Corporate  officials,  moreover,  do  not  hesitate  to  do 
things  in  the  name  and  under  cover  of  their  corporations  which 
they  would  be  ashamed  to  perform  openly  for  themselves.  In 
the  United  States  corporations  have  been  guilty  of  buying  leg- 
islatures, corrupting  judges,  bribing  juries,  entering  into  agree- 
ments with  political  parties  insuring  them  certain  privileges  in 
return  for  campaign  contributions,  and  in  fact  of  every  sin  in 
the  political  calendar.  It  is  owing  largely  to  them  that  the 
tone  not  only  of  business  but  of  political  morality  is  so  much 
below  the  standards  of  private  life.  This  third  group  of  evils 
is  at  the  basis  of  the  "  corporation  problem."     As  this  is  a 


Practical 
Aspects 
of  Cor- 
poration 
Problem 


148  Production:  Co-operation  and  Organisation 

phase  of  the  more  important  "  trust  problem  "  its  fuller  discus- 
sion is  postponed  to  the  chapter  on  Trusts. 

The  stockholders  of  corporations  might  from  what  has  been 
said  be  expected  to  manifest  an  active  interest  in  their  manage- 
ment, and  this  is  true  of  large  stockholders  who  are  likely  to 
be  at  the  same  time  directors.  Small  stockholders,  however, 
are  very  often  surprisingly  indifferent  so  long  as  dividends  are 
regularly  paid  and  nothing  occurs  to  excite  their  suspicion  that 
the  business  is  being  improperly  managed.  When  a  corporate 
enterprise  is  first  launched  its  stock  is  likely  to  be  subscribed  in 
large  blocks  by  the  men  most  interested  in  it  and  most  san- 
guine of  its  success.  Some  shares  may  go  to  the  general  pub- 
lic, but  usually  a  controlling  interest  is  retained  by  the  men  who 
have  most  to  lose  if  the  business  fails.  During  the  first  year 
or  two  the  stockholders  and  the  active  directors  are  thus  apt  to 
be  identical  or  so  nearly  so  that  risk  and  responsibility  go 
together.  Among  the  directors  there  is  likely  to  be  a  guiding 
spirit  who  performs  all  the  essential  functions  of  the  entrepre- 
neur except  that  others  share  with  him  the  risks  of  the  enter- 
prise and  the  minor  details  of  management.  After  a  corpora- 
tion is  firmly  established  on  a  paying  basis  the  same  conditions 
may  and  often  do  continue,  but  it  is  quite  as  likely  that  the 
organisers  will  gradually  dispose  of  their  interests  to  investors 
so  that  they  may  have  their  capital  free  for  the  promotion  of 
other  enterprises.  When  this  occurs  the  stock  is  gradually 
diffused  throughout  the  community  until  the  largest  holdings 
represent  far  from  a  majority  of  the  outstanding  shares  and  the 
control  of  the  corporation  has  virtually  passed  out  of  the  hands 
of  the  few  into  the  hands  of  the  many.  Under  these  condi- 
tions the  control  of  the  busmess  depends  not  on  the  actual  in- 
vestment of  capital  in  it,  but  on  control  over  the  votes  of  widely 
scattered  and  uninformed  stockholders.  The  situation  is  still 
favourable  to  the  ascendency  of  some  one  man  of  great  organ- 
ising ability  and  much  depends  upon  the  moral  qualities  that 
such  a  man  brings  to  his  position.  If  he  is  self-seeking  and 
unscrupulous  he  may  pack  the  board  of  directors  with  followers 
of  the  same  stamp  and  deliberately  wreck  the  enterprise  for 
his  own  aggrandisement.  If,  on  the  other  hand,  he  is  honestly 
anxious  to  promote  the  interests  of  the  company,  and  brings 


Large-  vs.  Small-scale  Production       149 

ability  to  his  task,  he  will  put  in  as  directors  the  best  men  he 
can  get  and  build  up  an  organisation  whose  efficiency  will  com- 
pare favourably  with  that  of  businesses  owned  and  controlled 
by  single  entrepreneurs  or  partners.  At  each  stage  in  cor- 
porate development  the  tendency  thus  appears  to  be  toward 
control  by  one  man  or  a  small  group  of  men,  however  widely 
the  stock  may  be  distributed.  Successful  corporations  are  as 
much  one-man  or  few-men  enterprises,  as  regards  their  actual 
management,  as  firms  composed  of  partners.  The  chief  dififer- 
ence  is  that  corporate  entrepreneurs  incur  but  a  small  part  of 
the  actual  risk  of  loss  that  partners  incur  and  must  be  held  to 
the  efficient  performance  of  their  duties,  if  at  all,  by  higher 
standards  of  honesty  and  faithfulness  to  trust  than  are  de- 
manded in  the  latter  form  of  organisation.  In  spite  of  the 
many  abuses  connected  with  corporate  finance  in  the  United 
States  the  rapid  extension  of  the  corporate  form  of  organisa- 
tion is  believed  to  be  proof  of  parallel  progress  in  business 
morality.  If  directors  of  corporations  were  not  as  a  class 
honest  and  upright  men,  few  large  corporations  would  be 
formed,  for  the  simple  reason  that  few  people  would  be  willing 
to  invest  their  capital  in  such  hazardous  enterprises. 

§  85.  Different  branches  of  production  vary  greatly  as  re-  Large- 
gards  the  size  of  the  business  unit  which  is  best  adapted  to  J^f^jf"^^^^' 
them.  In  farming  in  the  United  States  the  small  farm  of  from  Production 
twenty  to  two  hundred  acres  seems  to  be  displacing  the  larger 
farm  of  five  hundred  acres  and  upwards.  In  manufacturing 
and  transportation,  on  the  contrary,  large-scale  production  is 
becomine:  more  and  more  the  rule.  The  striking  merit  of  small- 
scale  production  is  the  undivided  attention  which  it  pennits  the 
entrepreneur  to  give  to  all  of  the  details  of  the  business.  This 
is  particularly  important  in  farming  and  in  artistic  and  pro- 
fessional work,  where  continuous  attention  to  matters  of  detail 
is  the  chief  requisite  to  success.  It  is  less  important  in  manu- 
facturing and  transportation  because  the  operations  required 
in  these  businesses  can  be  reduced  to  routine  and  an  efficient 
check  on  the  work  of  employees  can  be  maintained  by  occa- 
sional attention  to  what  they  are  doing.  In  these  industries  a 
great  variety  of  contrivances  which  compel  men  to  register  the 
results  of  their  work  as  they  perform  it  have  been  invented, 


Advan- 
tages of 
Large- 
Scale 

Production: 
Division 
of  Labour 


Expensive 
Machinery 


150   Production:  Co-operation  and  Organisation 

and  these  act  as  mechanical  substitutes  for  "  the  master's  eye." 
Also  where  automatic  machinery  is  used,  the  pace  is  set  for  all 
operatives  and  they  have  to  fall  in  with  it  or  incur  the  risk  of 
being  discharged  for  incompetence.  Finally,  the  system  of  pay- 
ing wages  in  proportion  to  the  pieces  turned  out,  or  the  piece- 
wage  system,  makes  the  interest  of  the  labourer  as  great  as 
that  of  the  employer  in  the  efficiency  of  his  work.  By  these 
methods  and  others  considered  in  the  chapter  on  Trusts  large- 
scale  producers  in  manufacturing  and  transporting  industries 
offset  the  more  careful  supervision  and  attention  to  details  of 
small-scale  producers.  . 

Large-scale  producers  enjoy  besides  important  positive  ad- 
vantages :  ( I )  As  was  pointed  out  in  connection  with  the  dis- 
cussion of  partnerships  and  corporations,  they  can  command 
a  variety  of  different  talents  and  place  them  in  those  depart- 
ments for  which  they  are  best  fitted.  This  is  another  way  of 
saying  that  they  are  able  to  apply  the  division  of  labour  even 
to  the  executive  branch  of  a  business  and  to  reap  all  of  the  ad- 
vantages that  result  from  it.  For  a  simple  business  such  as 
farming,  which  because  of  its  periodic  character  offers  con- 
tinuous employment  to  no  specialists,  this  consideration  is  of 
slight  moment.  For  manufacturing  and  transporting  indus- 
tries which  have  several  departments  going  all  of  the  time, 
however,  it  is  very  important. 

(2)  Large-scale  production  permits  the  economical  utilisa- 
tion of  expensive  machinery  and  equipment  which  the  small- 
scale  producer  cannot  afford,  or  which  it  would  not  pay  him 
to  have  because  his  small  business  would  not  keep  it  continu- 
ously employed.  Farmers  surmount  this  difficulty  in  a 
measure  by  owning  expensive  machines  jointly  and  sending 
them  round  from  one  farm  to  another  as  they  are  required. 
Manufacturers  can  hardly  do  this  because  their  machinery  is 
for  the  most  part  stationary.  At  best  it  is  a  poor  substitute  for 
undivided  ownership  and  control,  as  all  farmers  who  have  tried 
it  testify. 

The  above  consideration  applies  with  special  force  to  the 
transporting  industries.  Canal  and  railroad  companies  require 
expensive  excavations  and  roadbeds.  In  these  a  large  part  of 
their  capital  is  invested,  and  interest  on  this  capital  and  expenses 


Can  Spend  More  on  Experiments       151 

connected  with  the  maintenance  of  way  constitute  a  large  ele-  Advan- 
ment  in  their  expenses.     The  amount  of  traffic  that  may  pass  Trans- 
through  a  canal  or  over  a  railroad  is  limited  only  bv  the  fre-  porting 

.,,.,,  r  1     1  ,  '  f  1     Industries 

qucncy  with  which  boats  or  cars  may  satcly  be  sent  alter  each 

other.  Moreover  temperature  changes,  storms,  etc.,  determine 
the  expense  of  keeping  the  system  in  repair  much  more  than  the 
volume  of  business  done.  It  results  from  these  facts  that  the 
expense — as  regards  capital  account — per  passenger  or  per  ton 
of  freight  carried  diminishes  steadily  as  the  volume  of  business 
grows.  The  original  cost  and  the  outlay  for  maintenance  of 
way  appear  as  fixed  charges  and  the  larger  the  business  done 
the  smaller  is  the  expense  per  unit  as  regards  these  items.  If 
the  running  expenses  per  unit  are  fairly  constant,  as  they  are 
apt  to  be  for  a  well-managed  canal  or  railroad,  the  large-scale 
transportation  company  has  here  a  marked  advantage  over  its 
smaller  competitor  and  an  advantage  which  grows  as  the  busi- 
ness grows  until  the  traffic  has  become  so  large  that  it  cannot 
be  handled  without  numerous  accidents.  In  the  light  of  these 
two  advantages  concentration  in  the  transporting  industries  and 
in  many  branches  of  manufacturing  seems  a  perfectly  natural 
and  economically  desirable  tendency. 

(3)  A  third  advantage  of  the  large-scale  producer  is  in  con-  Economy 
nection  with  the  purchase  of  materials  and  the  sale  of  products.  e|jppi^'es^ 
Sellers  of  materials  are  willing  often  to  make  concessions  to 

large  buyers,  and  in  marketing  products  the  large  seller  may 
arrange  his  advertising  more  economically  than  his  small 
competitor. 

(4)  Large-scale  producers  can  make  a  better  use  of  by-  Economy 

products.     In  the  mineral  oil  and  the  meat-packing  industries  I? 

'  .  .       r  Connection 

large-scale  production  has  made  possible  the  utilisation  of  waste  v.-ith  By- 
products to  an  extent  undreamed  of  when  these  businesses  were  ^^^  '^^^^ 
carried  on  by  small  firms,  and  to  the  advantage  of  the  whole 
community. 

(5)  A  fifth  advantage  is   found  in  the  large  expenditures  Can  Spend 
which  a  large-scale  producer  is  able  to  make  on  experiments  ^j^  £^_ 
looking  to  the  improvement  of  the  technique  of  production,  periments 
In  businesses  which  are  changing  their  methods  continuously. 

to  be  the  first  to  introduce  a  valuable  innovation  means  often 
the  dift"erence  between  success  and  failure.    Manv  of  the  manu- 


152  Production:  Co-operation  and  Organisation 

facturing  establishments  which  have  been  most  successful  in 
the  United  States  in  recent  years,  such  as  the  Carnegie  Steel 
Company  of  Pittsburg,  have  owed  their  success  in  no  small 
degree  to  their  lavish  expenditures  on  industrial  experiments 
and  for  the  installation  of  new  machinery  as  soon  as  its  superi- 
ority to  that  in  use  has  been  demonstrated. 
Business  §  86.  Large-scale  production,  it  must  be  clearly  understood, 

prises  ^^    ^^    *^°    means    synonymous    with    monopoly    or    exclusive 

Classified  control  of  a  given  branch  of  production.  Nevertheless,  in 
those  cases  in  which  the  advantages  of  large-scale  produc- 
tion persist,  no  matter  how  large  the  producing  unit  becomes, 
monopoly  is  the  goal  towards  which  the  business  is  developing 
and  which  it  will  ultimately  attain.  This  suggests  a  threefold 
classification  of  industrial  enterprises  :  ( i )  businesses  in  which 
the  small-scale  producer  has  the  advantage,  as  in  farming  in  the 
United  States;  (2)  businesses  in  which  large-scale  production 
is  more  economical  up  to  a  certain  point,  beyond  which  the  loss 
in  efficiency  resulting  from  the  absence  of  the  direct  and  per- 
sonal supervision  of  the  entrepreneur  more  than  offsets  the 
gains  from  further  concentration;  (3)  monopolies.  In  this  clas- 
sification the  terms  "  small-scale  "  and  "  large-scale  "  produc- 
tion are  used  somewhat  vaguely,  but  they  serve  fairly  well  to 
distinguish  those  businesses  in  which  competition  persists  year 
after  year  with  no  sign  of  abatement,  from  those  in  which  com- 
petition has  ceased  or  has  become  so  irregular  and  spasmodic 
that  it  can  no  longer  be  depended  upon. 

The  Repre-        §  g?.  As  special  chapters  are  devoted  to  monopolies  it  will 
sentative  ,         ,    .     ,  ,  ,.  ,  .       ,  ,  .  .  ,  ,  , 

Firm  not  be  advisable  to  discuss  them  further  at  this  point.  Although 

numerous  and  perhaps  multiplying  in  the  United  States, 
monopolies  as  yet  dominate  but  a  small  part  of  the  vast  field 
of  production.  Farming,  most  branches  of  mining,  lumbering, 
fishing,  manufacturing,  trade,  banking,  and  many  branches 
of  the  transporting  industries,  are  still  controlled  more  or  less 
completely  by  competition.  In  each  of  these  industries  at  any 
given  time  there  is  a  certain  size  of  business  plant  which  under 
average  management  is  most  conducive  to  economical  produc- 
tion. This  may  be  designated  as  the  representative  firm.  As 
methods  of  production  change,  the  size  of  the  representative 
firm  of  course  changes  also,  but  such  changes  are  gradual  and 


Summary  153 

may  without  serious  error  be  overlooked  in  connection  with  the 
consideration  of  the  broader  problems  of  economics. 

The  representative  firms  in  each  branch  of  business  may,  as  Compared 
Professor  Marshall  has  suggested,  be  compared  to  the  full-  ii^'aVJr^e^s^,. 
grown  trees  of  a  primaeval  forest.  Around  them  and  compet- 
ing with  them  for  customers  are  overgrown  firms  that  are  fall- 
ing into  decay  and  new  firms  that  are  gradually  making  a  place 
for  themselves,  just  as  in  the  prim?eval  forest  overgrown  and 
decaying  trees  and  aspiring  young  saplings  struggle  with  their 
full-grown  brothers  for  a  share  of  earth  and  sunlight.  And 
just  as  the  trees  of  full  growth  are  the  dominant  feature  in  a 
])rimaeval  forest,  so  representative  firms  dominate  in  business. 

§  88.  The  contents  of  this  chapter  may  be  summarised  as  Summary 
follows :  The  productiveness  of  labour  is  increased  by  co- 
operation, which  may  take  the  form  either  of  simple  co-opera- 
lion  ;  a  division  of  employments,  or  simple  division  of  labour ; 
or  a  subdivision  of  tasks,  or  complex  division  of  labour.  The 
extension  of  the  division  of  labour  is  limited  by  the  develop- 
ment of  markets  and  of  facilities  for  transportation.  As  the 
latter  improve,  business  is  concentrated  in  the  most  favourable 
situations  and  the  division  of  labour  is  made  more  minute. 
Ability  to  co-operate  depends  on  certain  qualities  and  these  are 
developed  most  readily  by  co-operation  itself.  Co-operation 
has  important  advantages,  but  it  has  also  the  disadvantage  of 
encouraging  excessive  specialisation,  which  must  be  neutralised, 
if  deterioration  is  to  be  avoided,  by  added  leisure  for  the  work- 
ing classes.  The  remarkable  increase  in  the  productiveness  of 
labour  which  has  been  due  to  co-operation  is  illustrated  in  the 
shoe,  pin,  and  screw  industries. 

The  central  figure  in  business  organisation  is  the  entrepre- 
neur and  much  depends  upon  his  ability  and  judgment.  Three 
principal  forms  of  organisation  may  be  distinguished,  the  single 
entrepreneur,  the  partnership,  and  the  corporation.  Of  these 
the  last  already  dominates  at  least  two-fifths  of  the  business 
carried  on  in  the  United  States,  and  this  lends  special  interest 
to  a  consideration  of  its  advantages  and  disadvantages.  Re- 
lated to  the  problem  of  business  organisation  is  that  of  small 
vs.  large-scale  production.  Analysis  suggests  a  threefold  clas- 
sification of  business  enterprises  and  leads  to  the  recognition 


154  Production:  Co-operation  and  Organisation 

of  the  dominant  influence  of  the  representative  firm  in  the  first 
two,  in  which  competition  is  a  persistent  force. 

Relation  In  the  next  chapter  we  pass  from  production  to  distribution. 

Production    Both  parts  of  economics  deal  with  the  same  phenomena,  that 

and  Dis-        jg,  with  wealth  creation  throug^h  the  application  of  labour  aided 
tnbution        ,  .     ,         ,       ,    ,  ,  •,     ■  i        ■  ,  ■        •       , 

by  capital  to  land,  but  while  m  production  the  creation  is  the 

important  thing,  in  distribution  the  motives  which  control  men 
and  the  relation  of  the  parts  which  different  factors  play  in 
this  creation  are  important  because  upon  them  depends  the  divi- 
sion or  sharing  of  the  wealth  created.  As  the  analysis  pro- 
ceeds it  will  appear  that  production  and  distribution  mutually 
determine  each  other. 

REFERENCES  FOR   COLLATERAL   READING 

*Marshall,  Principles  of  Economics,  Book  IV.,  Chaps.  VHI.-XIII.; 
Walker,  Political  Economy,  Part  II.,  Chap.  IV. :  *  Nicholson,  Princi- 
ples of  Political  Economy.  Book  I.,  Chaps.  VII. -X.;  *  Fetter,  Princi- 
ples of  Economics,  Chap.  29. 


CHAPTER  IX 
PRODUCTION    AND    DISTRIBUTION 

§  89.  In  the  preceding  chapters  the  products  of  industry  Distribution 
have  been  referred  to  sometimes  as  commodities  and  services,  pirst  with 
sometimes  as  economic  goods,  and  sometimes  as  valuable  utilities.  Money 
It  is  these  same  commodities  and  services,  goods,  or  utilities, 
that  are  the  objects  of  distribution.  If  the  identical  goods  pro- 
duced were  directly  and  immediately  divided  between  those 
who  take  part  in  their  production,  the  matter  would  be  com- 
paratively simple.  But  such  production  *'  on  shares  "  belongs 
to  a  primitive  stage  of  industrial  development.  Under  modern 
conditions,  goods  are  produced  for  sale,  and  it  is  the  money 
or  purchasing  power  received  for  them,  rather  than  the  goods 
themselves,  that  is  the  first  concern  of  distribution.  Con- 
sider, for  example,  the  case  of  a  typical  business  establish- 
ment like  a  shoe  factory.  The  manager  of  such  an  enterprise 
would  never  think  of  compensating  his  employees  or  others 
who  have  claims  upon  him  with  pairs  of  shoes,  the  product 
of  his  business.  Instead,  he  sells  the  shoes  as  they  are  pro- 
duced for  the  best  price  obtainable,  and  the  money  or  purchas- 
ing power  he  receives  for  them  is  what  he  really  divides  be- 
tween those  who  have  claims  upon  the  product. 

In  determining  what  the  product  has  been,  and,  therefore.  The  Re- 
what  is  the  money  return  to  be  divided,  it  must  be  remembered  pund^is^De- 
that  not  all  the  new  commodities  and  services  produced  during  ducted  from 
a  year  are  to  be  credited  to  the  year's  industry.    In  connection  Return  to 
with  nearly  every  branch  of  production  there  is  a  destruction  of  ^'^^^'J™'"® 
commodities  and  services  for  which  full  allowance  must  be  income 
made  in  the  gross  product  before  the  net  product,  or  what  has 
really  been  added  to  the  wealth  of  the  world,  can  be  calculated. 
The  farmer  uses  up  seed,  fertilizers,  tools,  and  farm  buildings. 
The  manufacturer  destroys  raw  materials,  fuel,  machinery,  and 
factories.      Even   the   banker   and   professional   man   use   up 

155 


156  Production  and  Distribution 

stationery  and  office  furniture.  These  losses  and  wastes,  which 
are  a  necessary  part  of  all  production,  must  be  met  by  the 
deduction  from  the  gross  returns  of  the  year's  business  of  what 
we  may  call  a  replacement  fund.  Through  this  fund  raw 
materials  and  partially  finished  products  destroyed  or  altered 
in  form  are  replaced ;  buildings,  machines,  tools,  and  other 
things  subject  to  wear  and  tear  are  repaired  and  renewed;  and, 
finally,  provision  is  made  for  substituting  for  worn-out  ma- 
chines and  other  equipment,  new  capital  goods  of  at  least  equal 
efficiency.  The  deduction  to  be  made  from  the  gross  product 
for  the  replacement  fund  is  calculated  as  a  sum  of  money  or 
purchasing  power.  In  our  shoe  factory,  for  example,  the  capi- 
tal goods  used  up  in  the  process  of  production  cannot  be  re- 
placed literally  out  of  the  product.  It  is  not  shoes  that  are 
needed,  but  leather,  tools,  repairs  on  building  and  machinery, 
etc.  The  expense  of  making  these  replacements  and  repairs 
is  calculated  in  money  and  deducted  from  the  gross  money  re- 
turn from  the  year's  business.  The  net  money  return  which  is 
left,  and  which  we  shall  designate  in  future  as  the  money 
income,  is  the  first  object  of  the  distributive  process. 

Distribution       §  go.  But  if  monev  or  purchasing  power  is  the  first  thing 
of  Money  ,..,,..'  "  ,       rr-i  1  , 

Income  distributed,  it  is  onlv  as  a  means  to  an  end.     Ihose  who  take 

Merely  a        p^j-^  j[j^  production  desire  not  money,  but  want-satisfying  goods. 

iVi.  GciriSLO  '  ^ 

Distribution  To  determine  what  is  really  distributed,  we  must  inquire  what  is 
Income  bought  with  this  purchasing  power,  for  this  is  the  real  income. 

If  we  consider  the  question  with  reference  to  the  whole  indus- 
trial community,  it  is  obvious  that  the  money  income  that  is 
derived  from  the  products  of  industry  must  be  spent  in  turn 
for  the  products  of  industry.  We  may  go  even  further,  and  say 
that  as  regards  industrial  society  as  a  whole,  it  is  virtually  the 
net  product  itself  that  is  bought  with  the  price  of  the  net  prod- 
uct, and  that  is,  consequently,  the  ultimate  object  of  distribu- 
tion. Certain  facts  about  the  present  organisation  of  industry 
seem  to  contradict  this  conclusion,  and  to  these  we  must  give 
careful  consideration  before  regarding  it  as  established. 
Durable  The  first  complication  has  to  do  with  a  source  of  income  of 

tion  Goods      which  nothing  has  yet  been  said,  that  is.  with  the  valuable 

Contribute      utilities  that  are  gradually  given  off  bv  durable  consumption 

to  RgrI 

Income  goods.    The  business  man  distinguishes  sharply  in  his  thought . 


The  Net  Product  157 

between  capital  goods,  the  instruments  of  production,  and 
consumption  goods,  the  instruments  of  want-satisfaction.  He 
thinks  of  a  man's  store  or  warehouse  as  contributing  to  his 
annual  income,  but  rarely  of  his  house  or  his  furniture  as  doing 
the  same  thing.  But  if  we  accept,  as  we  logically  must,  the  view 
that  the  fruits  of  production  and  the  objects  of  distribution  are 
simply  valuable  utilities,  we  are  bound  to  take  into  account  in 
the  distributive  process  the  utilities  that  come  from  durable 
consumption  goods.  Houses  contribute  to  real  income  just  as 
much,  if  not  in  quite  the  same  way,  as  warehouses.  So  do  auto- 
mobiles, steam  yachts,  and  the  countless  other  things  in  the 
same  class.  But  if  durable  consumption  goods,  themselves  the 
products  of  the  industry  of  years,  or  even  decades,  gone  by,  con- 
tribute a  portion  of  the  valuable  utilities  that  are  purchased  with 
the  money  income  from  the  year's  business,  what  becomes  of 
the  proposition  that  what  is  divided  up  or  distributed  is  virtually 
the  net  product  of  the  year's  business  itself?  This  is  merely  a 
phase  of  a  larger  difficulty,  to  which  we  shall  next  proceed, 
and  in  answering  which  w'c  sliall  suggest  the  answer  to  the 
above  question. 

§  91.   Capitalistic  production,  as  already  explained,  differs  The  Net 
from  direct  production  principally  in  the  longer  interval  that  (jonsfsts 
must  elapse  between  its  inception  and  its  completion.    As  now  Mostly  of 
organised  production  is  a  prolonged,  serial  process.    Thus  the  Goods 
bread  that  appears  on  the  table  to-day  was  made  from  flour 
produced  weeks  or  months  ago.     This  flour  was  itself  made 
from  wheat  grown  perhaps  a  year  before.     Finally,  the  seed 
from  which  this  wheat  sprang  was  planted  six  months  earlier. 
And  what  is  true  of  bread  is  true  of  practically  every  commod- 
ity that  enters  into  consumption.     Only  services  which  must 
be  enjoyed,  if  at  all,  as  they  are  rendered,  are  consumed  as  they 
are  produced.     It  is  possible  only  to  guess  at  the  proportion 
of  the  valuable  utilities  embodied  in  the  commodities  and  serv- 
ices consumed  in  an  average  week  which  were  produced  dur- 
ing that  week,  but  it  is  safe  to  say  that  not  more  than  one- 
tenth  are  in  this  class.     Quite  nine-tenths  are  the  products  of 
the  industry  of  previous  weeks,  carried  along  to  the  present 
week  as  a  part  of  the  commimity's  capital.     Since  not  more 
than  one-tenth  of  the  utilities  currently  consumed  are  products 


158  Production  and  Distribution 

of  current  industry,  most  of  the  world's  workers  must  be  en- 
gaged at  any  given  time  upon  commodities  that  will  not  be 
ready  for  consumption  until  some  future  period.  That  this  is 
the  case  is  at  once  obvious  from  a  consideration  of  the  limited 
number  of  occupations  concerned  with  the  rendering  of  sersnces 
and  with  applying  the  final  touches  to  the  commodities  that 
enter  into  every-day  consumption.  Retail  dealers,  deliverers, 
cooks,  bakers,  etc.,  constitute  but  a  fra?ction  of  the  industrial 
population  of  any  modern  community. 
The  Real  Opposed  to  the  fact  that  fully  nine-tenths  of  the  products 

Gooc"s^  °^  °^  current  industry  are  not  in  consumable  form  is  the  equally 
Ready  for  certain  fact  that  practically  the  entire  money  income  is  spent 
tion^""^^'  ^°^  goods  that  are  ready  for  consumption.  Of  course,  some  in- 
come is  saved  and  invested,  but  the  great  bulk  of  it,  whether 
received  by  wage-earners,  employers,  or  capitalists,  is  spent, 
and  spending  means  purchasing  finished  goods  immediately 
available  for  the  satisfaction  of  wants.  We  are  thus  seemingly 
brought  to  the  conclusion  that  it  is  not,  speaking  broadly,  the 
products  of  their  own  industry  that  are  shared  among  those 
who  take  part  in  production,  but  the  products  of  past  industry. 
If  we  think  of  the  products  of  industry  as  pouring  into  a  reser- 
voir, we  must  think  of  real  income  as  being  drawn  out  ©f  th(: 
reservoir  on  the  other  side,  and  as  consisting  for  the  most  part 
in  any  day,  week,  or  month  of  different  goods  from  those  which 
during  that  day,  week,  or  month  have  been  produced.  Since  the 
contents  of  the  reservoir  is  a  part  of  the  community's  accumu- 
lated fund  of  capital,  we  may  formulate  our  conclusion  in  the 
proposition  that  real  incomes,  the  commodities  and  services  for 
which  money  incomes  are  exchanged,  come  for  the  most  part 
out  of  capital,  rather  than  out  of  the  net  product. 

The  Picture       §  c)2.  The   reconciliation   of  the   proposition   just   advanced 
of  a  Society       ...  .,,.,,  ,  .  ,,       .      .        ,  , 

in  the  State  With   that  previously   laid   down,   that   virtually   it   is   the  net 

of  Normal  product  itself  that  is  the  final  object  of  the  distributive  process, 
can  most  easily  be  explained  by  considering  the  relation  that 
would  exist  between  the  net  product,  the  money  income,  and 
the  real  income  in  an  industrial  society  stripped  so  far  as  pos- 
sible of  all  complicating  and  irrelevant  phenomena.  To  picture 
such  a  society  let  the  reader  imagine  that  all  improvements  in 
productive  processes  are  for  the  time  being  suspended ;  that 


The  State  of  Normal  Equilibrium        159 

nature  assists  production  without  the  sHghtest  variation  from 
season  to  season;  that  each  grade  of  labour  is  self-renewing 
and  self-perpetuating,  while  the  population  as  a  whole  is  station- 
ary ;  that  the  fund  of  capital  is  kept  intact  through  exact  renewal  • 
by  means  of  the  replacement  fund  ;  that  the  wants  of  consumers 
do  not  change ;  and.  finally,  that  competition  has  perfectly  free 
play.  Under  these  circumstances  production,  distribution,  and 
consumption  would  go  on  very  much  as  they  do  in  actual 
society,  except  that  in  the  absence  of  all  change,  each  would  be 
perfectly  adjusted  to  the  others.  At  every  stage  of  production 
there  would  have  to  be  an  exact  replacement  from  the  previous 
stage  of  the  cai)ital  goods  destroyed.  Thus,  if  the  week  were 
the  unit  production  period,  the  week's  destruction  of  tools, 
machines,  and  other  instruments  of  production  must  be  just 
made  good  by  the  week's  flow  of  finished  capital  goods  from 
dealers  to  the  dififerent  stages  of  production.  The  week's  out- 
put of  raw  materials  must  just  replace  the  worked-up  materials 
which  manufacturers  pass  on  each  week  to  traders.  These 
latter  must  just  balance  the  week's  transfers  of  goods  from 
wholesale  dealers  to  retailers,  and  the  latter  must  in  turn  just 
offset  the  week's  sales  by  retailers  to  their  customers. 

Under  these  conditions  the  net  product  and  the  real  income  In  Such  a 
of  consumable  goods  must  be  identical  as  regards  both  the  kinds  x°  t  Product 
and  the  quantitv  of  valuable  utilities  of  which  each  is  composed,  a^n^  the 
and  the  money  income  must  exchange  indifferently  for  either,  are'lnter- 
This  must  be  the  case,  because  it  is  only  on  this  condition  changeable 
that  the  exact  replacement  all  along  the  line  necessary  to  the  il- 
lustration could  occur.     The  only  difference  between  the  net 
product  and  the  real  income  would  be  that  the  former  was  made 
up  of  valuable  utilities  not  yet  brought  together  in  those  combi- 
nations  desired   bv  consumers,   while   the   latter   consisted   of 
exactly  similar  valuable  utilities  combined  in  finished  products. 
If  we   describe   the   situation   resulting   from   the   above   as- 
sumptions as  that  of  normal  equilibrium,  we  may  conclude  that 
for    an    industrial    society    brought    to    the    state    of    normal 
equilibrium,  our  proposition  that  it  is  virtually  the  net  product 
itself  that  is  distributed  as  real  income  to  those  who  take  part  in 
production  is  fully  justified. 

Of   course,   no   one   of   the    assumptions    upon    which    the 


i6o  Production  and  Distribution 

Actual  imagined  society  rests  is  fully  realised  in  any  actual  society, 

Socie\^"^        and  yet  there  is  more  in  common  between  it  and  actual  indus- 
Tends  trial  societies  than  might  at  first  be  supposed.     The  dominant 

Tow^ard^the  characteristic  of  the  latter  looked  at  in  their  entirety  is  not 
State  of  change  but  permanency  and  stability  of  relations.  JNIen  drop 
Equ^fbrium  °'-^^'  ^"^  others  inherit  their  tasks  and  perform  them  much  as 
they  did  themselves.  Population  is  not  stationary,  but  it  is  so 
nearly  so  from  year  to  year  that  the  great  majority  of  the  chil- 
dren born  each  week  virtually  take  the  places  of  persons  who 
have  just  died.  Goods  are  worn  out  and  destroyed,  but  new 
goods  are  being  produced  in  a  continuous  stream,  so  that  the 
aggregate  wealth  of  society  changes  little  over  short  periods 
either  as  regards  its  amount  or  the  kinds  of  goods  of  which  it  is 
composed.  In  the  same  way  improvements  in  methods  of  pro- 
duction, if  all  processes  are  considered,  follow  each  other  but 
slowly.  Moreover  in  every  society,  no  matter  how  rapidly 
it  is  progressing  in  population,  wealth,  or  the  technique  of  pro- 
duction, economic  forces  are  constantly  working  towards  the 
state  of  normal  equilibrium. 

Net  Prod-  Pqj.  these  reasons  the  proposition  that  the  net  product  and 

uet  and  Real  .  . 

Income  Ap-  the  real  income  are  exact  duplicates  of  one  another  applies  with 

proximately   ^^^^  slight  modification  to  actual  societies.    In  the  United  States 
Inter-  ^ 

changeable    to-day,  for  example,  as  in  the  hypothetical  society,  the  greater 
United  P^^^  '^^  ^^^^  wealth  withdrawn  each  week  from  dealers'  stocks 

States  to  constitute  the  real  incomes  of  sharers  in  distribution  is  re- 

placed in  kind  and  quantity  by  the  net  product  of  the  week's  in- 
dustry, in  the  same  way  that  the  water  which  flows  through  a 
mill-race  from  a  pond  kept  at  a  certain  level  is  replaced  by  the 
water  which  flows  from  the  mill  stream  on  the  other  side.  As 
in  the  latter  case  we  may  say  that  the  water  which  propels  the 
mill  wheel  during  any  hour  is  virtually  the  water  that  flows 
into  the  mill  pond,  so  we  may  say  in  the  former  that  real  in- 
comes come  virtually  from  the  net  products  of  industry.  In 
both  instances  there  is  the  same  necessary  connection  between 
the  inflow  and  the  outflow. 

The  assumption  of  a  state  of  normal  equilibrium  is  a  conve- 
nient logical  device  for  disentangling  normal  and  permanent 
influences  and  their  effects  from  transient  influences  and  the 
confusing  situations  to  which  they  give  rise.     In  this   con- 


Graphic  Illustration 


i6i 


nection  it  helps  to  make  clear  the  fact  that  notwithstandin.i:? 

all  of  the  complexities  of  actual  industrial  relations  it  is  still 

substantially  true  that  the  net  product  of  industry  from  day  to 

day  and  week  to  week  is  the  source  of  the  real  incomes  of  those 

who  take  part  in  production.    This  is  an  important  clue  to  aid 

in  the  solution  of  the  problem  of  distribution,  and  it  is  the  task 

of  the  following  chapters  to  follow  it  to  its  logical  conclusion. 

§  93.  It  may  help  to  make  the  propositions  that  have  been  Graphic 

explained  in  the  preceding  sections  more  intelligible  if  we  at-  tjo^  ^f  t^e 

tempt  to  present  them  in  graphic  form.    The  following  figure  Foregoing 

1  ,     •         1    .  .1  .  ,  ,     ,  ,  Propositions 

represents  the  relations  between  the  net  product  and  the  real 

income  in  an  industrial  society  brought  to  the  state  of  normal 

equilibrium : 


Durable  Consumption  Goods  "- 


Fig.  6. 

In  this  diagram  are  represented  in  successive  and  connected 
compartments  the  three  great  branches  of  production :  the 
extractive  industries,*  manufacturing,  and  transportation  and 
trade.  Raw  materials,  the  products  of  the  extractive  industries, 
flow  through  from  left  to  right,  being  enriched  as  they  pass 
along  by  the  addition  of  form,  place,  time,  and  possession  utili- 
ties. On  leaving  the  hands  of  dealers,  they  are  separated  into 
two  great  streams,  one,  the  replacement  fund,  which  flows  back 
to  repair  and  renew  capital  goods  worn  or  destroyed  in  the  proc- 

*  This  is  the  term  applied  to  hunting,  fishing,  stock-raising,  farming, 
forestry,  mining,  and  quarrying,  since  they  are  concerned  for  the  most 
part  with  securing  materials  directly  from  nature. 


i62  Production  and  Distribution 

ess  of  production,  the  other,  consumption  goods,  which  begin 
immediately  to  satisfy  wants.  The  latter  stream  is  again  sub- 
divided, one  branch  conveying  the  second  and  subordinate 
replacement  fund  needed  to  repair  and  renew  the  durable  con- 
sumption goods  whose  presence  is  indicated  at  the  top  of  the 
diagram  and  which  give  ofif  a  continuous  stream  of  utilities 
to  mingle  with  those  afforded  by  transient  consumption  goods, 
the  other  and  larger  branch  into  which  the  main  consumption 
goods  stream  is  divided.  The  net  product  represented  in  this 
diagram  consists  in  part  of  raw  materials,  in  part  of  manufac- 
tured goods,  finished  and  unfinished,  and  in  part  of  the  utilities 
subsequently  added  at  the  stage  "  transportation  and  trade." 
Only  a  very  limited  part  is  sufficiently  advanced  to  be  flowing 
out  with  the  stream  of  consumption  goods  to  minister  directly 
to  human  wants.  On  the  other  hand  it  is  in  this  stream  of  con- 
sumption goods  that  the  entire  real  income  for  which  the  money 
income  is  exchanged  is  found.  Although  the  identical  goods 
constituting  the  real  income  are  thus  for  the  most  part  other 
than  the  goods  constituting  the  net  product,  the  latter  consists 
of  exactly  similar  utilities  quantitatively  and  qualitatively 
as  the  former.  At  each  point  the  streams  of  goods  flow  on 
evenly  and  unbrokenly  so  that  the  "  transient  consumption 
goods  "  that  are  allowed  to  escape,  and  which  constitute  the  real 
income,  are  exactly  replaced  by  the  goods  included  in  the  net 
product.  The  diagram  thus  represents  movement  without 
change.  It  depicts  the  circulation  of  goods  that  is  going  on 
in  actual  industrial  society  with  the  elemen«^s  of  change  and 
monopoly  eliminated. 
The  §  94.  A  convenient  bridge  for  passing  from  the  problems 

ProducdoiT    °^  production  to  the  problems  of  distribution  is  furnished  by  the 
Defined  expenses  of  production.    As  used  in  these  pages  this  term  in- 

cludes every  item  of  outlay  which  producers  must  normally 
and  regularly  incur  to  put  goods  on  the  market  and  effect  their 
sale  and  also  such  compensation  as  producers  normally  and 
regularly  require  as  the  condition  to  their  continuing  to  serve 
industrial  society  in  the  capacity  of  entrepreneurs.  These  items 
are  as  follows :  ( i )  outlays  for  materials,  wear  and  tear  of 
buildings  and  machinery,  etc.,  or  the  replacement  fund;  (2) 
premiums  paid  for  the  insurance  of  capital  goods;  (3)  interest 


Items  in  the  Expense  of  Production     163 

for  the  use  of  capital ;  (4)  wages  to  labourers  of  all  grades ;  (5) 
rent  of  land  and  natural  power  used  in  production;  (6)  taxes; 
(7)  minimum  profits  to  the  entrepreneur  to  remunerate  him  for 
his  own  time  and  trouble. 

The  first  item  calls  for  no  further  explanation.    As  a  matter  The  Re- 
of  course  every  business  man  deducts  a  replacement  fund  from  jpund"^^° 
the  price  he  receives  for  his  products.     Premiums  for  insur- 
ance, looked  at  broadly,  are  merely  additional  expenses  for  the 
replacement  of  capital  and  may  properly  be  included  in  the  first 
item.     Insurance  companies  learn  by  experience  what  propor-  Insurance 
tion  of  the  particular  kinds  of  capital  goods  they  insure  is  likely     remiums 
to  be  destroyed  in  a  normal  year.     They  charge  rates  which 
will  enable  them  to  replace  losses  and  at  the  same  time  make 
some  profit  for  themselves.     When  organised  on  the  mutual 
plan,  as  is  increasmgly  common,  their  character  as  agencies  for 
the  co-operative  replacement  of  capital  goods  liable  to  destruc- 
tion through  accident  is  clearly  apparent  as  the  element  of  profit 
is  then  eliminated  and  the  officials  of  the  company  appear  as  the 
employees  of  the  insured  for  whose  sole  benefit  the  business  is 
carried  on. 

The  item  of  interest  for  the  use  of  capital  is  calculated  at  a  Interest 
certain  rate  per  cent,  per  annum  for  the  capital  employed. 
Thus  if  a  business  ties  up  on  the  average  throughout  the  year 
capital  goods  worth  $10,000  and  the  current  rate  of  interest  is 
five  per  cent.,  $500  should  be  charged  as  expense  for  interest. 
This  item  appears  whether  in  the  particular  business  considered 
borrowed  capital  or  capital  belonging  to  the  firm  is  used.  If 
the  fomier  is  the  case  the  expense  for  interest  is  an  actual  out- 
lay, if  the  latter  it  is  a  virtual  outlay,  since  using  the  capital  in 
the  business  prevents  loaning  it  at  the  current  rate  to  some 
other  entrepreneur. 

The  propriety  of  naming  wages  as  one  of  the  items  of  ex-  Wages 
pense  is  obvious.  As  the  term  is  here  used  it  includes  all  pay- 
ments for  labour,  whether  wages  in  the  ordinary  sense  or  sala- 
ries. It  is  convenient  to  go  even  further  and  to  include  in  it 
the  seventh  item  enumerated  above,  the  minimum  profit  re- 
ceived by  the  entrepreneur,  on  the  ground  that  the  latter  is 
merely  a  zvaf^cs  of  management  and  as  appropriately  included 
in  wages,  although  paid  by  the  entrepreneur  to  himself,  as  is 


164 


Production  and  Distribution 


Rent 


Taxes 


Summary 


Differences 
in  Ex- 
penses of 
Production 


the  interest  charged  for  the  use  of  a  firm's  own  capital  in- 
cluded in  interest.  The  amount  that  should  be  charged  as 
wages  of  management  or  minimum  profit  is  what  the  entrepre- 
neur could  obtain  for  his  services  if  he  worked  for  wages  or  for 
a  salary  for  a  corporation  or  other  employer.  Unless  he  nor- 
mally obtains  this  at  least  from  the  business  he  carries  on,  he 
will  give  it  up  and  become  a  wage-earner  or  salaried  official. 

The  rent  of  land  or  natural  power  was  spoken  of  in  Chapter 
VI.  as  a  profit  over  and  above  the  expenses  of  production.  To 
the  farmer  cultivating  his  own  land  it  is  an  item  of  return 
rather  than  an  outlay ;  but  the  same  reasons  that  cause  econo- 
mists to  include  an  allowance  for  interest  on  a  firm's  own  capital 
and  for  wages  to  the  entrepreneur  himself  among  the  ex- 
penses of  production,  lead  them  to  treat  rent  also  as  an 
expense  of  production.  To  the  entrepreneur  using  leased  land 
rent  is  an  expense.  If  instead  he  uses  land  which  he  himself 
owns  it  is  virtually  an  expense  because  by  using  it  he  loses  the 
rent  he  might  have  obtained  had  he  leased  it  to  another.  As 
already  stated,  rent  is  a  variable  item  to  different  producers, 
depending  on  the  quality  and  situation  of  the  lands  they  use. 
It  does  not  appear  at  all  among  the  necessary  outlays  of  so- 
called  marginal  producers.  But  the  land  or  natural  power  that 
can  be  used  free  of  charge  is  of  poor  quality  and  most  producers 
find  rent  an  important  item  among  their  expenses. 

Taxes  are  another  irregular  charge  from  which  many  pro- 
ducers are  exempt.  Their  amount  depends  upon  the  arbitrary 
decision  of  the  taxing  power  and  for  this  reason  and  because 
they  do  not  affect  at  ail  many  branches  of  production  we  may 
leave  them  out  of  account  in  our  treatment  of  distribution. 

Summarising  the  results  of  the  preceding  discussion  it  ap- 
pears that  the  items  in  the  expense  of  production  may  be  re- 
duced to  four :  ( I )  Expense  for  replacement  or  maintenance 
of  capital  goods,  (2)  interest,  (3)  wages,  (4)  rent. 

§  95.  The  expenses  of  producing  commodities  of  each  sort 
are  different  for  different  firms.  For  new  firms  just  establish- 
ing business  connections  and  not  yet  ready  to  produce  on  the 
scale  that  experience  has  shown  to  be  most  economical,  ex- 
penses are  high.  They  are  high  also  for  old  firms  that  are 
overgrown  or  for  some  other  reason  are  falling  into  decay. 


The  Normal  Expenses  of  Production     165 

They  are  lowest  for  the  representative  firms  which  have  at- 
tained just  the  size  conducive  to  economical  production.  Dif- 
ferences might  be  expected  to  arise  also  from  differences  in  the 
quality  of  the  land  and  natural  power  used  and  in  the  abilities 
of  entrepreneurs,  but  it  must  be  remembered  that  these  are 
fully  covered  by  the  items  rent  and  wages  of  management  in- 
cluded in  the  expense  of  production  itself.  For  example,  if 
two  equally  able  farmers  produce  wheat  for  the  same  market 
and  the  first  obtains  in  normal  years  twenty-five  bushels  to  the 
acre  for  a  given  outlay  of  labour  and  capital  and  the  second 
only  twenty  bushels  for  the  same  outlay,  the  difference  must  be 
due  to  differences  in  the  fertility  of  the  areas  cultivated  and 
should  be  credited  to  the  better  land  as  rent.  If  the  cultivator 
did  not  own  the  better  land  or  if  he  decided  to  lease  it  to  some 
one  else  the  equivalent  of  this  difference  in  product  might 
actually  be  required  as  the  proper  rent  per  acre  of  the  better 
farm  over  and  above  the  rent  that  must  be  paid  for  the  other. 
In  the  same  way  able  entrepreneurs  whose  careful  planning 
and  wise  supervision  keep  down  the  other  expenses  of  produc- 
tion require  proportionate  compensation  in  higher  wages  of 
management.  Such  men  know  pretty  well  what  their  services 
are  worth  and  unless  their  occupation  rewards  them  ade- 
quately will  turn  to  something  else. 

The  expenses  of  production  of  the  representative  firm  are  the  The 
normal  expenses  of  production,  and  so  long  as  competition  re-  Expenses  of 
mains  an  active  force  they  determine  the  normal  price  about  Production 
which,  as  already  explained,  the  market  price  of  each  competi- 
tively produced  commodity  tends   to  oscillate.     The   market 
price  cannot  fall  for  any  length  of  time  below  the  expenses  of 
production  to  a  representative  firm,  for  under  such  circum- 
stances representative  firms  suffer  losses  and  proceed  to  curtail 
production  until  demand   for  the  diminishing   supply   of  the 
commo<lity  brings  its  price  back  to  a  remunerative  level.    The 
market  price  cannot  rise  for  any  length  of  time  above  them  • 
because  then  all  representative  firms  will  be  making  an  extra 
profit  and  some  will  seek  to  secure  more  of  it  by  enlarging  the 
volume  of  their  production.     Supply  will  be  increased  and  this 
in  time  will  bring  the  price  down  to  the  old  level  or  force  it 
below  it.     Or,  looking  at  other  effects,  as  the  price  falls  be- 


i66  Production  and  Distribution 

low  the  expenses  of  production  to  the  representative  firm  de- 
caying firms  are  forced  into  bankruptcy  and  new  firms  are  sa 
discouraged  as  to  withdraw  from  the  business  and  in  this  way- 
supply  is  lessened.  On  the  other  hand  a  rising  price  not  only 
encourages  tottering  firms  to  keep  up  the  struggle  but  induces 
new  firms  to  enlarge  the  capacity  of  their  plants  for  the  double 
purpose  of  selling  more  at  the  high  price  and  of  realising  the 
economies  of  large-scale  production.  In  these  ways  the  supply 
is  increased  and  the  price  is  brought  back  to  the  normal. 
Active  It  must  be  carefully  noted  that  the  above  reasoning  assumes 

Competition  ^q^  q^u,  active  competition  but  the  absence  of  change  as  re- 
gards  the  expense  of  production  per  unit  of  product  which 
representative  firms  incur.  If  conditions  are  changing  so  that 
these  expenses  vary  constantly  even  the  most  persistent  com- 
petition may  fail  to  cause  the  price  of  the  product  to  corre- 
spond accurately  to  the  normal  expenses  of  production.  It 
would  tend  always  towards  such  correspondence,  but  it  might 
never  attain  to  it. 
Normal  Normal  prices  for  competitively  produced  goods  just  cover 

Prices  Just     ^|^g  expenses  of  their  production — the  allowance  for  the  replace- 
Normal  ment  of  capital  goods,  interest,  wages,  and  rent.     As  a  usual 

Expenses  of  ^.j^jj^or  these  four  items  of  expense  are  incurred  bv  the  entrepre- 
Production  ^  ^  -  ^ 

neur  before  production  is  concluded  and  before  he  knows  what 
prices  he  is  going  to  get  for  his  products.  He  buys  his  mate- 
rials, tools,  machinery,  and  other  capital  goods  at  current  prices, 
he  borrows  capital  to  pay  for  them  and  perhaps  to  pay  wages 
at  current  rates,  he  hires  labour  and  leases  land  on  the  terms 
fixed  for  him  by  general  market  conditions  rather  than  on  his 
own  terms,  and  all  of  these  arrangements  are  entered  into  be- 
fore the  product  is  ready  for  sale.  It  is  in  this  contracting  to 
pay  the  expenses  of  production  before  the  product  is  ready 
for  sale  or  the  price  to  be  received  for  it  known  that  the  princi- 
pal risks  of  business  which  it  is  the  entrepreneur's  function  to 
incur  consist.  If  prices  are  normal  the  representative  firm  re- 
ceives from  its  sales  just  enough  to  cover  its  expenses  of  pro- 
duction including  an  adequate  wages  of  management.  Any 
deviation  from  the  normal  means  extra  profit  or  unexpected 
loss  to  the  entrepreneur  or  to  stockholders  who  are  the  risk- 
takers  in  corporate  enterprises. 


Limits  to  Theory  of  Di:^tribiition         167 

The  market  prices  of  goods  may  differ  from  the  normal  Reasons  for 

...  ,  ^  ,      .         ,  Deviation  of 

prices  corresponding  to  the  normal  expenses  of  producing  them,  Market  from 

either  because  conditions  are  changing  and  competition  has  not  ^-ormal 

.  Prices 

yet  adjusted  supi)ly  to  demand  at  the  new  normal  price  level, 

or  because  competition  is  itself  absent  and  monopoly  stands  as 

a  barrier  to  such  an  adjustment.     In  the  former  case  we  have 

to  do  with  what  we  may  call  a  net  or  competitive  profit  (or 

loss)  ;  in  the  latter  with  monopoly  profit. 

8  q6.  From  the  point  of  view  of  production  rent,  wages,  and  I'l'e 
.   ^^    ^  ^  ,  .,  .  .  ,  '        ^     '  Relation 

interest  are  expenses  while  competitive  and  monopoly  profits  Between 

are  surpluses  due  to  deviations  of  market  prices  from  the  nor-  Production 

IT-  •  r  r        ■  -1  r-  ^"^   DlStn- 

mal.  From  the  point  of  view  of  distribution  all  five  are  shares  bution 
into  which  the  net  product  of  a  country's  industries,  that  is, 
the  gross  product  less  the  deduction  required  to  replace  and 
maintain  the  fund  of  capital  goods,  is  divided.  It  is  the  task 
of  the  theory  of  distribution  to  explain  what  causes,  at  last 
analysis,  determine  the  size  of  these  difTerent  shares.  In  the 
following  pages  we  have  attempted  to  prove  the  thesis  that 
competition  tends  to  secure  for  each  factor  in  production  a 
share  of  the  product  equal  to  wdiat  it  itself  produces.  Every  cir- 
cumstance which  causes  market  to  diverge  from  normal  prices 
interferes  with  this  result  and  occasions  profit  or  loss  to  entre- 
preneurs above  or  below  their  proper  wages  of  management. 
The  chapters  on  Net  or  Competitive  Profits  and  on  Monopoly 
Profits  discuss  the  circumstances  that  may  cause  such  diver- 
gence and  the  shares  of  income  to  which  they  give  rise.  The 
chapters  which  follow  on  Rent.  Wages,  and  Interest  attempt  to 
show  that  each  tends  to  be  the  share  of  the  normal  price  corre- 
sponding to  what  the  factor  concerned  contributes  to  produc- 
tion. Finally  the  concluding  chapters  on  \^alue  and  Distribu- 
tion recapitulate  the  explanation  in  more  general  terms  and 
attempt  to  clear  up  difficulties  and  answer  objections. 

An  explanation  of  the  causes  that  determine  the  shares  into  J^Iany 
which  the  net  product  is  divided  is  by  no  means  a  complete  wealth  and 

account  of  the  influences  which  make  some  men  rich  and  others  Poverty  not 

^1  •  10-1       Included  in 

poor.     There  are  a  great  many  circumstances  that  afreet  the  Theory  of 

distribution  of  property  that  are  uneconomic  in  character.     For  Distributioa 

example,  no  one  factor  is  more  potent  in  deciding  that  some 

shall  be  rich  while  others  are  poor  than  the  inheritance  of 


i68  Production  and  Distribution 

wealth.  On  this  topic  the  economist  should  have  something 
to  say,*  but  it  is  not  a  matter  that  can  be  treated  profitably  in 
a  theory  of  distribution.  In  the  same  way  the  philanthropies 
of  public-spirited  citizens  in  endowing  art  galleries  and  other 
institutions  for  public  enjoyment  and  instruction  and  the 
intelligent  expenditures  of  municipalities  in  supplying  free 
schools,  playgrounds,  and  parks,  contribute  important  elements 
to  the  real  incomes  of  the  inhabitants  of  every  community,  but 
these  contributions  are  not  subject  to  economic  law.  The 
theory  of  distribution  is  necessarily  limited  to  the  division  of 
the  product  among  those  who  on  one  ground  or  another  have 
an  economic  claim.  It  must  be  supplemented  by  a  study  of 
many  other  factors  to  give  that  complete  understanding  of  the 
causes  of  wealth  and  poverty  which  all  of" us  desire  to  have. 

REFERENCES  FOR  COLLA TERAL  READING 

*Clark,  The  Distribution  of  Wealth,  Chaps.  II. -VI.;  "^ Fetter,  The 
Principles  of  Economics,  Chaps.  6,  30,  42,  and  43;  *  Marshall,  Princi- 
ples of  Economics  (fourth  edition),  Bk.  VI.,  Chaps.  I.  and  II.; 
*Carver,  The  Distribution  of  Wealth,  Chap.  III. 

*  Cf.  Sections  316,  323,  324,  and  333. 


CHAPTER  X 
DISTRIBUTION  :   NET   OR   COMPETITIVE    PROFITS 

§  97.  As  an  introduction  to  an  analysis  of  the  causes  of  net  The  Wages 
or  competitive  profits,  a  more  exact  description  should  be  given  "^  ^I'"!"- 
of  the  "  usages  of  management."  As  business  is  now  organised 
in  progressive  countries  there  is  a  demand  for  hired  vi^orkers 
possessing  every  variety  of  ability.  From  the  forty  cents  a 
day  paid  to  wage-earners  in  certain  occupations  in  the  United 
States  to  the  $100,000  a  year  paid  to  the  president  of  the 
United  States  Steel  Corporation  is  a  long  step ;  but  these  and 
all  intermediate  earnings  of  hired  workers  are  to  economic 
analysis  simply  wages  paid  for  services  rendered.  Nearly  if 
not  quite  as  comprehensive  as  the  wages  scale  is  the  scale  of 
entrepreneurs'  earnings  or  wages  of  management.  All  but  the 
very  lowest  groups  of  hired  workers  have  among  them  indi- 
viduals who  may,  if  they  choose,  set  up  in  business  for  them- 
selves. Even  sweat-shop  employees  have  as  an  alternative 
occupation  peddling,  in  which  they  assume  the  risks  of  loss. 
Agricultural  workers  may  become  homesteaders  or  in  the  more 
settled  portions  of  the  country  may  rent  small  plots  of  land  to 
cultivate  at  their  own  risk.  Similar  hut  more  numerous 
alternatives  are  open  to  the  higher  groups  up  to  the  highly 
paid  managers  of  large  corporate  enterprises,  any  one  of  whom 
could  with  his  superior  executive  ability  direct  either  of  a  num- 
ber of  businesses  successfully. 

When  a  man  who  is  or  might  be  earning  a  certain  wage  or  The  Wages 

salarv  as  an  emplovee,  chooses  instead  to  figure  as  an  inde-  °^  JManage- 

'      -      '  '^  ment  Set 

pendent  entrepreneur,  it  is  reasonable  to  assume  that  he  ex-  a  Minimum 

pects  to  better  his  condition.     He  mav  make  the  change  be-  ^^'p^ 
■^  .  ^  ^  which 

cause  he  loves  independence  or  because  the  new  occupation  is  Profits  Will 
more  congenial,  but  he  is  not  apt  to  make  it  unless  he  expects  Len^^li^"^ 
also  to  realise  the  same  or  higher  earnings  than  in  the  other  Time  Fall 
position  open  to  him.     Tlie  wage  or  salary  that  might  be  ob- 

160 


lyo     Distribution:   Net  or  Competitive  Profits 

tained  is  thus  a  minimum  profit  or  wages  of  management  that 
must  be  paid  to  the  entrepreneur  in  order  to  secure  his  services 
in  connection  with  his  entrepreneur  function.  At  any  given 
time  the  members  of  any  group  of  workers  may  be  distin- 
guished into  three  types :  ( i )  men  and  women  who  do  well  as 
employees,  but  have  not  the  enterprise  to  set  up  in  business  for 
themselves,  (2)  men  and  women  who  are  planning  to  becom-;. 
entrepreneurs  and  are  only  waiting  for  favourable  opportunities 
to  begin,  (3)  men  and  women  who  have  been  entrepreneurs, 
but  have  been  compelled  through  failure  to  return  to  the 
ranks  of  hired  workers.  Individuals  of  the  first  type  exert 
little  influence  on  the  earnings  of  their  group.  They  ac- 
cept what  industrial  conditions  enable  them  to  get.  Those 
of  the  second  and  third  types,  on  the  other  hand,  are  impor- 
tant factors  in  determining  the  amount  of  these  earnings. 
The  former  are  constantly  studying  other  industrial  oppor- 
tunities and  through  their  readiness  to  abandon  the  positions 
which  they  have  in  order  to  launch  out  as  entrepreneurs,  the 
rate  of  wages  for  their  group  is  prevented  from  falling  below 
the  earnings  of  entrepreneurs  of  the  same  grade.  More  impor- 
tant for  our  present  purpose  is  the  conduct  of  persons  of  the 
third  type,  who  have  resumed  their  posts  as  wage-earners 
because  their  earnings  as  entrepreneurs  have  ceased  to  equal 
even  the  wages  that  they  can  obtain  in  such  positions.  Their 
ready  return  to  the  ranks  of  employees  prevents  entrepreneurs' 
earnings  from  falling  except  for  brief  periods  below  the  wage 
level. 

The  Wages       Xhe  wages  of  management  has  been  defined  as  the  wages  or 
of  Manage-        ,  ,  .  ,  .    ,  ,  ,  .         ^       ,  . 

nient  May     salary  which  an  entrepreneur  might  earn  by  w^orkmg  for  hire. 

Be  a  Very  jt  [^  large  or  small  according  to  the  grade  of  labour  for  which 
the  entrepreneur  is  fitted,  and  may  equal  only  the  dollar  or  less 
a  day  of  the  itinerant  peddler  or  organ  grinder  or  the  $100,000 
a  year  of  the  salaried  manager  of  a  billion-dollar  corporation. 
Arguing  that  free  competition  tends  to  keep  the  earnings  of 
entrepreneurs  down  to  bare  wages  of  management,  does  not, 
therefore,  imply  that  these  earnings  are  scanty.  Bare  wages 
for  the  efficient  manager  of  a  gigantic  corporation  constitute 
a  princely  income.  It  simply  recognises  that  wages  of  man- 
agement are  governed  by  the  same  law  that  controls  wages 


The  Power  of  Substitution  171 

generally  and  that  for  this  reason  they  require  no  separate 
explanation. 

§  98.  In  this  chapter  we  are  confinirig  attention  to  net  or  Conditions 
competitive  profits.  To  understand  the  origin  of  such  profits  ^i^g^g^- 
one  must  appreciate  clearly  the  limits  to  the  power  of  the  indi-  trepreneur 
vidual  entrepreneur  over  the  conditions  under  which  he  carries 
on  business.  In  the  first  place  the  entrepreneur's  influ- 
ence over  the  prices  at  which  he  buys  materials  and  other 
capital  goods  and  at  which  he  sells  his  products  is  deter- 
mined largely  by  general  market  conditions.  In  a  progressive 
society  in  which  prices  are  constantly  fluctuating  he  may,  if  he 
be  both  shrewd  and  lucky,  buy  more  cheaply  and  sell  more 
dearly  than  his  competitors,  but  this  is  through  taking  advan- 
tage of  fluctuations,  rather  than  through  creating  them.  Sec- 
ondly, the  rents  he  must  pay  for  pieces  of  land  and  the  rates  of 
wages  and  of  interest  he  must  pay  for  his  labour  and  capital 
are  determined  by  general  conditions  and  are  largely  beyond 
his  control.  This  does  not  mean  that  it  is  not  possible  for  an 
employer,  sometimes,  to  take  advantage  of  the  inertia  of  his 
work  people  to  cut  wages,  but  merely  that  if  he  does  so  while 
wages  paid  by  other  firms  remain  as  before  he  will  begin  to 
lose  his  best  men  even  if  he  does  not  precipitate  a  strike.  In 
general  entrepreneurs  must  pay  current  rates  for  the  factors 
of  production  they  employ.  Although  limited  in  these  two 
particulars,  the  entrepreneur  enjoys  full  independence  in  de- 
ciding what  goods  he  shall  produce,  what  quantity  he  shall 
produce,  and  by  what  methods  he  shall  produce. 

§  99.  Of  all  the  liberties  of  the  individual  in  industrial  so-  The  Power 

ciety,  the  most  precious  is    the  libertv  to  substitute  one  thing  ^^  Substi- 
r  ,  ,  .       ,     .    -.  ,  ^  tution 

tor  another  or  the  pozvcr  of  substitution.     At  present  we  are 

concerned  with  this  power  as  exercised  by  entrepreneurs.  The 
substitutions  open  to  them  are  of  two  kinds.  First,  there  are 
substitute  uses  to  which  the  dififerent  factors  of  production 
may  be  put.  Pieces  of  land  may  be  used  for  different  crops  or 
building  sites,  workers  may  be  employed  at  different  tasks,  and 
capital  goods,  except  those  that  are  highly  specialised,  may  be 
made  to  aid  production  in  different  ways.  In  general  entrepre- 
neurs tend  to  devote  each  particular  factor  to  that  use  in  which 
it  affords  the  largest  return.    Second,  there  are  substitute  com- 


The  Source 
of  Profits 
above  the 
Wages  of 
Manage- 
ment 


Price 

Fluctua- 
tions a 
Source  of 
Profits 


Ex- 
planation 


172     Distribution:  Net  or  Competitive  Profits 

biiiations  of  the  factors  of  production  that  may  be  made  for 
the  accomphshment  of  the  same  productive  purpose.  For 
example,  dirt  may  be  moved  by  many  men  with  httle  capital 
in  the  form  of  hand  shovels  or  by  few  men  with  much  capital 
in  the  form  of  steam  shovels.  Shoes  may  be  made  largely  by 
hand  or  largely  by  machinery.  A  given  crop  may  be  raised  on 
one  piece  of  land  without  capital  in  the  form  of  special  ferti- 
lisers or  on  another  with  fertilisers.  In  deciding  between 
these  and  alternative  combinations  entrepreneurs  tend  to 
choose  the  ones  that  are  cheapest  in  the  given  situations. 

If  all  changes  were  suspended  entrepreneurs  would  use  their 
power  of  substitution  until  each  factor  was  assigned  to  that 
branch  of  production  in  which  it  afforded  the  largest  return 
and  until  in  each  branch  of  production  just  that  combination 
of  factors  was  made  which  was  found  to  be  most  economical 
under  the  given  conditions.  As  a  result  industrial  society 
would  be  brought  to  a  state  of  normal  equilibrium.  All  prices 
would  be  stable ;  production,  distribution,  and  consumption 
would  follow  each  other  with  undeviating  regularity,  and  the 
profits  of  entrepreneurs  would  just  cover  their  wages  of  man- 
agement. In  actual  industrial  society,  far  from  being  sus- 
pended, changes  are  of  frequent  occurrence.  Prices  are  un- 
stable ;  new  goods  are  invented  and  put  upon  the  market ; 
methods  of  producing  old  goods  are  improved,  and  the  supplies 
of  the  factors  of  production  increase  or  diminish.  Each  one 
of  these  changes  causes  a  modification  in  the  earnings  of  the 
entrepreneurs  affected  and  gives  rise  to  the  extra  gain  or  loss 
which  we  call  net  or  competitive  profits. 

§  100.  One  of  the  most  frequent  causes  of  profits  or  losses 
to  entrepreneurs  are  unexpected  changes  in  the  prices  of  the 
goods  they  buy  or  sell.  Such  changes  may  be  due  to  influences 
affecting  the  demand  for  such  goods  or  their  supply,  or  they 
may  be  the  result  of  a  rise  or  fall  in  the  value  of  money,  the 
medium  in  which  prices  are  quoted.  In  the  former  case  they 
affect  chiefly  the  one  good  in  which  the  entrepreneur  is  inter- 
ested ;  in  the  latter  they  affect  all  goods  and  may  be  the  cause 
of  general  prosperity  or  general  depression. 

The  way  in  which  price  changes  affect  profits  is  obvious. 
Every  entrepreneur  in  making  his  calculations  estimates  that 


Efforts  to  Control  Prices  173 

he  must  pay  certain  prices  for  the  materials,  etc.,  that  he  uses 
and  that  he  will  receive  certain  prices  for  his  products.  If 
prices  change  after  he  has  begun  his  business  so  that  he  has 
to  pay  more  for  his  materials  or  so  that  he  receives  less  for 
his  products,  the  difference  comes  out  of  his  expected  profits. 
If,  on  the  other  hand,  the  prices  of  materials  fall,  or  the  prices 
of  finished  products  rise,  there  is  here  an  unexpected  extra 
gain  to  be  added  to  the  profit  which  he  counted  upon 
receiving. 

Price  oscillations  have  become  such  a  familiar  condition  of  Efforts  to 
competitive  business,  and  tli*  uncertainty  they  introduce  into  p^^g^g^ 
business  calculations  is  so  distasteful  to  conservative  entrepre- 
neurs, that  many  expedients  are  resorted  to  to  confine  them 
within  the  narrowest  possible  limits.  Perhaps  the  most  com- 
mon are  agreements  among  producers  to  maintain  prices  for  a 
specified  period.  Such  agreements  range  all  the  way  from 
verbal  understandings  which  may  be  broken  by  simple  notice 
on  the  part  of  one  of  the  contracting  parties,  to  formal  combi- 
nations which  substitute  monopoly  for  competition  as  the  regu- 
lator of  prices.  To  be  eft'ective  the  latter  must  be  supplemented 
by  machinery  for  curtailing  or  enlarging  production  so  that  the 
supplies  offered  at  the  established  prices  may  always  just 
satisfy  the  demand.  As  forms  of  monopoly  such  combinations 
are  discussed  in  later  chapters. 

Although  mere  agreements  as  to  prices  lessen  the  frequency  The  Conse- 
of  fluctuations  they  do  not  lessen  their  extent.     On  the  con-  tj^eFTnure 
trary  their  tendency  appears  to  be  to  increase  the  violence  of  of  Such 
changes  when  they  do  occur.     The  rise  or  fall  in  price  which    '    °^  ^ 
in  the  absence  of  any  agreement  results  from  a  number  of  slight 
modifications,  is  made,  under  the  system  of  agreements,  at  one 
bound  as  soon  as  the  agreement  lapses  or  is  broken  and  free 
play  is  again  given  to  the  pent-up  forces  of  competition.     In 
spite  of  this  disadvantage  entrepreneurs  seem  to  find  even  tem- 
porary  stability   preferable  to  the  constant  oscillations  of  a 
freely  competitive  market,  and  price  understandings  between 
competitors    ranging   from   the    familiar   pools   of   the    stock 
market  to  agreements  among  producers  of  materials  such  as 
coal  and  iron  ore,  and  of  agricultural  products,  such  as  fruit, 
are  becoming  more  and  more  common  phenomena. 


Dealings 
in 

"  Futures" 


Dealings 
in  Futures 
Illustrated 
by 

Reference 
to  Wheat 


174    Distribution:  Net  or  Competitive  Profits 

Another  expedient  for  minimising  price  fluctuations  is  deal- 
ing in  "  futures."  Entrepreneurs  who  wish  to  ehminate  as  far 
as  possible  from  their  business  the  element  of  uncertainty  con- 
tract ahead  both  for  the  materials  they  are  to  use  and  for  the 
sale  of  their  own  products.  This  practice  has  become  espec- 
ially marked  in  the  building  trades  and  in  connection  with 
different  branches  of  iron  and  steel  production.  Building  con- 
tractors, for  example,  before  making  bids  on  the  erection  of 
structures,  secure  options  at  certain  prices  for  the  delivery  of 
the  materials  they  will  require.  They  then  make  their  esti- 
mates with  full  knowledge  in  regard  to  the  cost  of  these  ma- 
terials. If  their  bids  are  accepted  the  only  uncertainties  in- 
volved in  the  venture  attach  to  the  accuracy  of  their  estimates 
of  the  quantities  of  materials  required  and  of  the  expense  of 
labour.  Similarly  in  the  iron  and  steel  business  it  is  customary 
for  manufacturers  to  contract  ahead  for  materials  at  the  same 
time  that  they  book  orders  for  their  products  months  in  ad- 
vance. The  tendency  of  dealings  in  futures  is  to  assign  to  a 
particular  class,  namely,  to  those  who  have  a  special  talent  and 
taste  for  forecasting  price  variations,  the  task  of  estimating  the 
future  conditions  of  demand  and  supply  in  each  market  and 
naming  in  advance  the  prices  which  competition  will  tend  to 
establish.  The  more  accurately  this  class  makes  its  calcula- 
tions, the  more  perfectly  will  its  operations  cause  the  present 
price  of  each  good  to  adjust  itself  to  the  price  to  be  established 
in  the  future.  The  best  illustration  of  this  in  the  United 
States  is  furnished  by  transactions  on  the  produce  exchanges. 

§  1 01.  It  has  become  customary  in  all  large  cities  for  produce 
brokers  to  make  contracts  for  the  delivery  of  the  great  staples, 
corn,  wheat,  cotton,  etc.,  three,  six,  and  even  nine  months  in 
advance.  As  this  is  being  written  (December,  1901)  wheat 
is  being  dealt  in  for  December,  May,  and  July  delivery.  The 
United  States  has  harvested  an  unusually  small  corn  crop  and 
in  consequence  the  prices  of  the  grains  are  rather  more  un- 
settled than  is  usual  at  this  season  of  the  year.  The  general 
impression  is  that  the  price  of  wheat  will  be  favourably  affected 
by  the  scarcity  of  corn  and  the  question  that  brokers  are  trying 
to  solve  is  how  great  a  rise  in  price  may  be  looked  for  from 
this  cause.     The  wheat  available  for  May  delivery  has  already 


The  Economic  Function  of  Speculation    175 

been  harvested  and  its  amount  can  be  estimated  with  a  fair 
degree  of  accuracy.  Between  the  end  of  May  and  the  end  of 
July  new  wheat  will  find  its  way  to  the  market,  and  this  is  a 
factor  to  be  reckoned  with.  Figuring  on  these  data  and  any 
others  that  they  can  secure,  wheat  operators  make  their  esti- 
mates in  regard  to  probable  price  movements.  They  decide  in 
their  own  minds  what  prices  will  prevail  in  May  and  July  and 
buy  or  sell  accordingly.  Suppose  that  an  influential  group  of 
operators  accurately  foresees  that  a  much  higher  price  must  pre- 
vail in  May  than  prevails  in  December.  Their  course  will  be  to 
buy  wheat  for  May  delivery  and  to  continue  to  buy  it  as  long  as 
there  is  any  margin  between  the  price  they  anticipate  and  the 
price  at  which  others  are  willing  to  contract  to  deliver  it.  But 
all  wheat  stored  in  elevators  in  December  is  potentially  wheat 
for  May  delivery.  It  is  a  simple  calculation  to  subtract  the 
fee  for  storage  and  the  interest  on  the  capital  invested  to  deter- 
mine what  price  such  wheat  should  command  in  December  to 
correspond  with  a  given  May  price.  As  the  May  price  rises 
the  December  price  must,  in  the  absence  of  some  extraor- 
dinary condition,  rise  also.  It  follows  that  by  forecasting 
accurately  the  higher  price  to  prevail  five  months  hence  the 
operators  have  helped  to  advance  the  present  price  of  wheat. 
As  the  price  rises  present  consumption  will  be  curtailed  some- 
what and  more  wheat  will  be  set  aside  for  future  use.  This 
additional  wheat  will  figure  as  part  of  the  May  supply  and 
should  lead  the  operators  referred  to  to  reduce  somewhat  their 
estimate  of  the  May  price.  The  lower  price  for  wdieat  for 
future  delivery  will  be  reflected  back  to  present  or  cash  wheat 
and  will  depress  its  price.  In  this  way  by  means  of  calcula- 
tions which  constantly  require  revision  operators  in  futures 
tend  to  adjust  the  present  to  the  future  price  and  to  narrow  the 
range  of  price  oscillations. 

Some  of  the  shrewdest  and  best-informed  men  in  the  United  The 

States  find  it  profitable  to  devote  much  of  their  time  to  studv-  Economic 
'  -      r  unction 

ing  the  conditions  of  supply  and  demand  with  reference  to  each  of  Specu- 
of  the  great  staple  products.     They  make  mistakes  in  their  cal-  ^^^^°^ 
culations  of  course,  and  very  often  buy  or  sell  for  future  de- 
livery at  prices  widely  different  from  those  which  actuallv  pre- 
vail when  the  future  time  arrives.     But  they  are  less  apt  to 


Specula- 
tion 7/^. 
Gambling 


176     Distribution:   Net  or  Competitive  Profits 

make  mistakes  than  men  who  are  without  their  special  talent 
and  training,  and  on  the  whole  their  operations  have  a  decidedly 
steadying  influence  on  the  prices  of  the  commodities  in  w'hich 
they  deal.  Even  more  important  is  the  service  they  render  in 
assuming  risks  in  regard  to  price  changes  which  otherwise  all 
entrepreneurs  would  have  to  share  and  in  making  it  possible 
for  conservative  producers  to  know  just  what  prices  they  wall 
have  to  pay  for  needed  materials  months  before  they  have  occa- 
sion to  use  them. 

Not  a  little  criticism  has  been  directed  against  dealings  in 
futures  on  the  ground  that  such  transactions  are  highly  specu- 
lative. This  cannot  be  denied,  but  it  must  be  remembered  that  it 
is  not  merely  the  dealings  in  futures,  but  the  future  itself,  that  is 
uncertain.  If  such  dealings  can  be  confined  to  the  men  most 
competent  to  make  accurate  predictions,  their  tendency  will 
clearly  be  to  lessen  the  uncertainties  of  business.  The  opera- 
tions of  such  men  prepare  the  whole  business  community  for 
changes  that  are  inevitable,  long  before  less  observing  people 
see  any  reason  for  them.  Unfortunately  the  question  of  the 
social  expediency  of  dealings  in  futures  is  mixed  up  with  the 
wider  question  of  the  expediency  of  stock  and  commodity 
speculation  as  it  is  now  carried  on  in  the  financial  centres  of  the 
country.  It  is  notorious  that  this  speculation  is  not  confined  to 
men  who  make  it  a  business  and  are  trained  for  it  in  the  hard 
school  of  experience,  but  that  it  is  also  indulged,  in  intermit- 
tently by  a  great  army  of  men  and  women  whose  only  qualifica- 
tions are  a  taste  for  gambling  and  the  consciousness  of  having 
money  to  invest.  To  the  extent  that  these  uninformed  specu- 
lators accept  the  leadership  of  men  of  sound  judgment  and  wide 
experience,  their  presence  simply  increases  the  influence  which 
such  men  can  bring  to  bear  when  they  deem  imminent  a  change 
in  prices.  Too  often,  however,  the  mob  follows  after  some 
false  prophet  and  makes  him  more  of  a  power  for  evil  than  he 
could  be  if  he  had  only  his  own  wealth  to  misdirect,  or  is  de- 
ceived by  some  sagacious  but  unscrupulous  operator  who  cir- 
culates false 'reports  designed  to  cheapen  what  he  wants  to  buy 
or  to  enhance  in  price  the  things  he  wants  to  sell.  In  either 
case  its  influence  is  altogether  pernicious.  How  to  confine 
speculation  to  those  who  have  aptitude  and  training  for  it  and 


Influence  on  Profits  of  Risini^-  Prices       177 

to  discourage  stock  and  commodity  gambling  is  one  oi  the 
economic  problems  of  the  day. 

The  general  conclusion  of  this  section  is  that  price  fluctua-  Conclusion 
tions  arc  an  important  source  of  profits  and  losses  in  the  United 
States,  but  that  the  tendency  seems  to  be  towards  developing  a 
special  class  of  entrepreneurs  who  take  the  risks  of  price 
changes  and  enjoy  all  the  profits  or  suffer  all  the  losses 
to  which  they  give  rise.  In  ordinary  times  losses  due  to  price 
fluctuations  are  likely  to  offset  gains  traceable  to  this  cause. 
Such  fluctuations  make  little  difference  in  the  earnings  of 
entrepreneurs  considered  collectively,  although  they  are  so 
potent  in  assigning  profit  to  some  and  loss  to  others  in- 
dividually. 

§  102.  In  addition  to  oscillations  in  the  market  prices  of  par-  The 
ticular  articles,  there  are  general  price  movements  which  o^'p^ofifg 
affect  all  business.  When  money  prices  generally  are  rising  of  Risiug 
all  entrepreneurs  are  in  the  happy  situation  of  receiving  more 
for  their  goods  than  they  expected.  They  have  paid  or  agreed 
to  pay  for  materials  and  factors  of  production  prices  and  rates 
adjusted  to  lower  price  conditions.  Any  increase  in  the  prices 
they  obtain  for  their  products  affords  an  extra  or  net  profit. 
The  usual  effect  of  such  a  situation  is  to  stimulate  enter- 
prise. Everyone  in  business  for  himself  is  making  money 
and  all  but  the  most  conservative  want  to  enlarge  the  volume 
of  their  businesses  so  that  they  may  make  more.  Entre- 
preneurs eagerly  compete  with  each  other  for  control  over  the 
factors  of  production,  and  by  this  competition  rents,  wages,  and 
interest  arc  advanced  until  prosperity  appears  to  be  general. 
To  illustrate,  suppose  the  different  branches  of  production  are 
represented  by  the  letters  A,  B,  C,  D,  etc.  In  all  these  indus- 
tries profits  above  the  wages  of  management  are  being 
received.  Entrepreneurs  in  industry  A  are  encouraged  to 
enlarge  the  producing  capacities  of  their  plants  and  to  enter  the 
market  as  hirers  of  labour  and  borrowers  of  capital.  But  the 
number  of  workmen  and  the  supply  of  capital  goods  are  not  to 
be  increased  at  will.  To  employ  more  labour  and  capital  at  A 
means  normally  to  draw  them  away  from  B,  C,  and  D,  and  this 
can  be  done  only  by  offering  higher  wages  and  higher  rates  of 
interest.     But  at  B,  C,  and  D,  there  are  similar  inducements  to 


lyS    Distribution:  Net  or  Competitive  Profits 

enlarge  production.  Rather  than  lose  workmen  or  capital 
goods,  entrepreneurs  in  these  industries  will  offer  still  higher 
wages  and  interest.  This  competition  will  continue  as  long  as 
there  is  any  extra  profit  in  any  line  of  competitive  business  to 
induce  it.  Unless  prices  continue  to  advance  to  ever  higher 
levels  the  rising  expenses  of  production  will  presently  cut 
down  the  margin  of  profit  until  it  again  amounts  only  to  the 
wages  of  management  to  which  entrepreneurs  are  entitled. 
Such  bursts  of  prosperity,  if  unaccompanied  by  an  actual  in- 
crease in  the  net  product  of  goods,  benefit  entrepreneurs  at  the 
expense  of  the  other  sharers  in  distribution,  whose  money  in- 
comes increase  less  promptly  than  the  prices  of  the  goods  they 
consume.  As  a  rule,  however,  one  effect  of  rising  prices  is  to 
furnish  more  active  employment  for  all  of  the  factors  in  pro- 
duction and  to  cause  a  correspondingly  enlarged  output  of 
goods.  In  time  this  increased  volume  of  goods  will  be  avail- 
able for  consumption  and  then  the  prosperity  begins  to  have  a 
solid  basis  in  the  increased  well-being  of  all  classes  in  the 
community. 
Of  Falling  A  period  of  falling  prices  affects  industrial  relations  in  an 
exactly  opposite  way.  Instead  of  receiving  profits  in  excess  of 
their  wages  of  management,  entrepreneurs  now  experience 
losses.  To  reduce  these  as  far  as  possible,  they  tend  to  reduce 
the  volume  of  goods  which  they  produce  and  to  curtail  the  ex- 
penses of  production.  Either  by  discharging  workmen  and 
failing  to  renew  capital  as  capital  goods  are  worn  out,  or  by 
cutting  down  rents,  wages,  and  interest  rates,  entrepreneurs 
compel  other  classes  to  share  their  losses  with  them.  Unless 
the  fall  in  prices  continues,  it  will  not  be  long  before  the  ex- 
penses of  production  are  scaled  down  by  these  measures  to  a 
point  which  again  permits  entrepreneurs  to  enjoy  wages 
of  management  commensurate  with  their  abilities.  In  this 
case  the  depression,  in  the  sense  of  diminished  well-being,  will 
be  merely  apparent  until  it  causes  an  actual  curtailment  of 
the  net  product.  During  the  short  interval  that  business  is 
continued  on  the  same  scale  in  the  hope  that  the  drop  in  prices 
will  prove  to  be  only  temporary,  what  entrepreneurs  lose  will 
be  gained  by  other  sharers  in  distribution,  w^hose  money  in- 
comes now  mean  larger  command  over  consumable  goods. 


Influence  of  Discoveries  and  Inventions      179 


In  the  United   States,  even  more  than  in  other  countries,  Alterna- 

een 

I 

and 


great  importance  must  be  ascribed  to  alternating  periods  of  jj^.^^^. 

prosperity  and  depression  as  sources  of  profit  and  loss.     To  Prosperity 

refer  only  to  recent  years,  from  1893  until  the  summer  of  1897  Depression. 

conditions  were  such  thai  the  majority  of  entrepreneurs  found  J"  *-he 

....  ,  .,  United 

it  barely  worth  while  to  continue  in  business,  while  a  great  states 

many  were  unable  to  do  so.  During  the  four  years,  1893  to 
1896,  the  number  of  failures  in  the  United  States  aggregated 
57,412,  with  total  liabilities  amounting  to  $919,065,629.  Since 
the  summer  of  1897,  on  the  other  hand,  business  has  been  in  a 
flourishing  condition  and  there  is  every  indication  that  the 
profits  of  entrepreneurs  have  been  large.  During  the  four 
years,  1898  to  1901,  the  number  of  business  failures  was  only 
43,299,  and  what  is  even  more  significant,  the  total  liabilities 
were  only  $473,130,837,  or  little  more  than  half  those  for  the 
previous  years.  Of  course  in  each  period  there  were  some 
entrepreneurs  who  for  special  reasons  were  making  profits 
while  others  were  losing,  but  the  general  experience  was  as  de- 
scribed. The  cause  of  these  alternating  periods  of  prosperity 
and  depression  cannot  be  understood  until  we  have  considered 
the  subjects  of  Money  and  Credit  in  Chapters  XVII.  and 
XVIII. 

§  103.  Entrepreneurs  who  discover,  invent,  or  make  avail-  The 
able  new  and  more  economical  means  of  want  satisfaction  are  of 
among  the  greatest  benefactors  of  the  race.     It  is  through  their  Discoveries 
efforts  that  the  consumption  of  a  people  gradually  adjusts  itself  inventions 
to  the  productive  capacities  of  the  environment.     Examples  of  °°  Profits 
such   innovations   are   legion.     Of   late   years   in   the   United 
States  bananas  have  been  introduced  on  a  large  scale  as  a  cheap 
and  wholesome  supplement  to  the  cereal  foods  o'f  the  temperate 
zone.     At  the  same  time,  dozens  of  varieties  of  cereal  foods 
have  been  invented,  which  preserve  the  nutritious  elements  in 
the  grains  more  fully  than  the  white  wheat  flour  which  they 
serve  in  a  measure  to  supplant.     In  the  domain  of  transporta- 
tion, bicycles  and  trolley  cars  have  already  largely  superseded 
horses,  and  they  in  turn  are  beginning  to  be  superseded  by 
automobiles.     Other  recent  inventions  of  far-reaching  impor- 
tance are  the  telephone,  the  linotype,  and  the  typewriter.     In 
connection  with  each  of  these  innovations  and  thousands  of 


Tncreased 
Profits  of 
Some  En- 
trepreneurs 
Offset  by 
Diminished 
Profits 
of  Others 


1 80    Distribution:  Net  or  Competitive  Profits 

others  introduced  during  the  last  thirty  years,  large  profits 
have  been  made  either  by  the  inventors  themselves  or  by  entre- 
preneurs who  have  made  the  inventions  commercially  success- 
ful. Often  these  new  goods  or  the  methods  of  producing  them 
have  been  patented  and  the  profits  arising  from  them  have  been 
in  the  nature  of  monopoly  profits.  In  other  cases  they  have 
been  kept  secret  for  a  time.  Even  when  they  have  been  from 
the  first  open  to  competitive  production,  however,  it  has  taken 
time  for  the  supply  to  become  so  adjusted  to  the  demand  that 
the  price  has  left  no  margin  for  extra  profit  for  the  enterpris- 
ing pioneers. 

In  estimating  the  extent  of  the  profits  enjoyed  by  entrepre- 
neurs as  a  whole  in  consequence  of  the  introduction  of  novel- 
ties, two  substantial  deductions  must  be  made.  In  the  first 
place  few  if  any  new  goods  are  offered  for  sale  which  do  not 
attract  purchasers  from  other  goods.  Even  novelties  which 
do  not  directly  supersede  other  goods  previously  used  for  the 
same  purpose,  cause  substitutions  which  are  detrimental  to  the 
interests  of  other  entrepreneurs.  Thus  the  introduction  of  the 
bicycle  is  said  to  have  interfered  wdth  the  business  of  watch 
manufacturers  in  the  United  States.  In  a  similar  way  the 
introduction  of  the  trolley  car  led  to  the  shutting  down  of  more 
than  one  horseshoe-nail  factory.  From  the  large  profits  of 
entrepreneurs  who  produce  and  sell  successful  novelties,  must 
be  deducted  the  losses  of  entrepreneurs  wdiose  businesses  suft"er 
because  novelties  are  put  on  the  market.  The  second  deduc- 
tion is  for  losses  incurred  by  inventors  and  entrepreneurs  who 
try  to  make  a  success  of  novelties  which  are  not  appreciated 
by  the  consuming  public.  Millions  of  dollars  are  spent  every 
year  in  the  promotion  of  discoveries  and  inventions  which  are 
complete  failures  from  the  business  standpoint.  In  a  country 
like  the  United  States,  where  entrepreneurs  are  willing  to 
assume  large  risks  in  the  hope  of  large  gains,  it  is  not  at  all 
unlikely  that  more  is  lost  each  year  in  the  effort  to  find  a  market 
for  unsuccessful  novelties  than  is  made  in  connection  with 
those  which  succeed.  The  net  profit  to  entrepreneurs  collec- 
tively from  the  production  of  novelties  is,  for  this  reason, 
smaller  than  most  people  imagine. 

§  104.  Quite  as   conspicuous   in   a   progressive   country  as 


ice 


Process  by  which  Profits  arc  Eliminated     i8i 

profits    from    novelties    are    profits    from    improved    methods  The 

of    production.      Every    entrepreneur    is    constantly    on    the  of  Improve- 

alert  to  improve  his  methods  of  production  and  in  this  wav  ^,^^}^  \^    , 

\  .  „        .  ,  .  ,         ,  •       "     Methods  of 

to   reduce   his   expenses.      Consider,    tor   example,   the   situa-  production 

tion  of  farmers.  The  prices  they  are  to  get  for  their  products  °°  Profits 
and  the  rents,  wages,  and  interest  rates  they  must  pay  are 
determined  by  general  market  conditions.  If  they  are  to 
make  more  than  mere  wages  of  management  they  must  im- 
prove on  current  methods  of  cultivation.  By  treating 
the  land  in  a  different  way,  using  new  fertilisers,  organising 
their  labour  force  better,  or  buying  superior  kinds  of  agri- 
cultural machinery  with  their  capital,  they  may  accomplish  this 
result.  As  their  expenses  of  production  are  reduced,  a  larger 
or  smaller  margin  is  left  as  an  extra  profit  or  reward  for  their 
enterprise.  But  such  improvements  soon  become  matters  of 
common  knowledge  and  common  practice.  Other  farmers 
imitate  them,  and  in  time  they  become  the  methods  of  repre- 
sentative farmers  generally,  whose  expenses  have  a  determin- 
ing influence  on  prices.  The  extra  profit  which  was  for  a 
while  enjoyed  disappears  either  because  prices  are  lowered  or 
because  wages,  interest,  etc.,  are  raised,  or  because  both  changes 
co-operate  in  adjusting  prices  again  to  the  expenses  of  produc- 
tion. Sometimes  the  new  methods  of  production  arc  kept 
secret  so  that  they  do  not  become  general ;  at  other  times  they 
are  protected  by  patent.  Either  event  gives  rise  to  a  temporary 
monopoly  and  .to  a  special  monopoly  profit  which  may  be  en- 
joyed as  long  as  the  monopoly  continues. 

To  manufacturers  the  importance  of  new  methods  is  even  The 
greater  than  to  farmers.     Producing  usually  on  a  larger  scale    .u°^u^^  ^ 
and  employing  more   capital  of  diverse  and  complex  forms  Profits  are 
manufacturers  find  fullest  scope  for  any  originality  or  enter- 
prise which  they  may  possess.     Improvements  in  the  tools  and 
machines  used,  in  the  form  of  division  of  labour  employed,  and 
in  the  efficiency  with  which  natural  power,  labourers,  and  capi- 
tal goods  are  co-ordinated  and  made  to  work  together  towards 
the  common  end,  are  introduced  in  succession.    Each  improve- 
ment curtails  the  expenses  of  production  and  insures  to  the 
entrepreneur  adopting  it  a  temporary  profit.     If  he  can  keep 
the  new  process  secret  or  have  it  patented,  he  may  enjoy  a 


Eliminated 


Change 
a  Cause 
of  Profits 


Profits 
and  Losses 
the  Normal 
Conse- 
quences 
of  Progress 


The 

Influence 
of  the 
Variable- 
ness of 
Climate 
on  Profits 


182     Distribution:  Net  or  Competitive  Profits 

monopoly  profit  for  some  years ;  otherwise  it  soon  becomes  a 
matter  of  common  knowledge  and  is  adopted  by  one  com- 
petitor after  another  until  the  old  process  is  rendered  obsolete. 
In  time  expenses  of  production  and  prices  are  again  brought 
to  a  parity  and  the  extra  profit  is  eliminated. 

As  the  above  analysis  suggests,  profits  which  are  not 
monopoly  profits  are  soon  overtaken  and  eliminated  by  com- 
petition. If  improvements  were  to  cease  profits  from  this 
source  would  soon  cease  also.  In  progressive  communities 
they  continue  to  be  an  important  element  in  the  wealth  an- 
nually divided  among  the  sharers  in  distribution  because  im- 
provements follow  each  other  so  swiftly  that  for  every  extra 
profit  that  is  cut  off  by  competition  other  extra  profits  due  to 
more  recent  innovations  are  substituted. 

The  same  process  which  cuts  down  extra  profits  as  the  new 
methods  upon  which  they  depend  are  more  and  more  generally 
used,  inflicts  loss  on  entrepreneurs  who  have  not  the  intelli- 
gence or  enterprise  to  adopt  them.  Their  expenses  of  produc- 
tion remain  stationary  or  even  increase,  and  in  consequence 
they  incur  losses  as  the  competition  of  progressive  entrepreneurs 
forces  prices  down  to  the  new  cost  level.  From  this  it  follows 
that  the  extra  profits  of  the  progressive  are  usually  offset  before 
they  disappear  by  losses  on  the  part  of  the  plodding  and  un- 
progressive.  It  is  for  this  reason  that  business  failures  are 
more  common  in  the  most  progressive  and  on  the  whole  pros- 
perous countries  than  in  those  where  old  metljods  are  adhered 
to  and  innovations  are  frowned  upon.  In  the  former  competi- 
tion is  more  strenuous  and  the  relatively  unfit  are  more 
promptly  eliminated. 

§  105.  All  industries  which  depend  upon  climate,  rainfall, 
the  direction  and  velocity  of  the  winds,  or  other  variable  mani- 
festations of  nature  show  irregular  returns  from  year  to  year, 
and  these  irregularities  count  as  profits  or  losses  to  entrepre- 
neurs. The  variable  profits  of  the  farmer  from  this  cause  are 
familiar  to  everyone.  He  invests  capital  in  the  cultivation  of 
his  land,  paying  rent,  wages,  and  interest  at  rates  determined 
by  general  market  conditions.  In  making  his  calculations  he 
assumes  that  he  will  realise  at  least  an  average  crop.  If  it 
prove  to  be  a  good  year  the  crop  will  be  larger  than  the  average 


Profits  and  Losses  Balance  183 

^nd  he  will  receive  for  it  enough  to  cover  the  expenses  of  pro- 
duction and  to  leave  a  comfortable  margin  for  profit.  In  a 
poor  year,  on  the  contrary,  he  may  not  only  make  less  than 
his  proper  wages  of  management,  but  even  lose  some  of  his 
capital.  Similarly  dependent  upon  nature  are  cattle  raisers, 
hunters,  fishermen,  navigators,  and  many  others.  In  the  case 
of  each  the  variability  of  nature  appears  as  a  perennial  cause 
of  profits  and  losses. 

There  is  every  indication  that  progress  in  the  technique  of  Progress 
production    is    gradually    lessening    man's    dependence    upon  ^'"^-"'^^^^ 
nature's  moods  even  in  the  extractive  industries.     In  farming  Depend 
increased  ability  to  foresee  weather  changes,  artificial  irrigation,  ^"a^tur^e^^'^ 
and  a  host  of  other  improvements  enable  the  cultivator  to  sur- 
mount natural  difficulties  which  would  at  one  time  have  been 
fatal  to  success.     In  water  navigation  even  greater  advances 
have  been  made,  since  steam  vessels  are  now  well-nigh  indif- 
ferent to  all  but  the  severest  storms.    This  progress  will  doubt- 
less continue,  but  for  many  generations    the  industries  which 
at  some  points  depend  upon  variable  nature   will  show  profits 
or  losses  as  natural  conditions  are  favourable  or  the  reverse. 

In  connection  w^ith  the  variability  of  natural  conditions  a  Insurance 

special  kind  of  business  has  grown  up,  that  of  insurance.    Ex-  ^^  Escap- 

perience  has  taught  that  even  the  most  unusual  occurrences,  ing  Conse- 

such  as  the  number  of  suicides  in  a  given  month,  follow  each  changing 

other  with  considerable  uniformitv  year  after  3'ear  if  a  large  ^'^^"'^^j 

..,..,,.  .  ,        ,"       A  -1  1-1         Conditions 

group  of  mdividuals  is  considered.     Any  accident  to  which  a 

large  number  of  persons  is  liable,  and  which  can  be  confi- 
dently predicted  as  likely  to  befall  a  certain  proportion  each 
year,  offers  a  field  for  insurance.  If  all  of  the  persons  ex- 
posed to  the  accident  can  be  induced  to  contribute  pro  rata  to 
an  insurance  company,  sufficient  sums  to  make  good  the  loss 
to  those  who  actually  experience  it  may  be  accumulated.  By 
means  of  insurance  losses  which  formerly  fell  with  crushing 
force  upon  individual  entrepreneurs  may  now  be  changed  to 
one  of  the  items  in  the  normal  expense  of  production  for  all. 

If  a  general  view  of  profits  and  losses  due  to  the  variable-  Profits 
ness  of  nature  be  taken,  it  appears  probable  that  over  a  series  ^end  °o^^^ 

of  vears  thev   will  about  balance  each   other.     A  period  of  Balance 

Each  Other 
favourable  conditions  is  likely  to  be  followed  by  a  period  when 


Profits 
and  Rent 


Profits 
in  a  New 
Country 
Usually 
in  Excess 
of  Losses 


Practical 
Problem 
Connected 
with 

Profits  Due 
to  Exploita- 
tion of 
Virs:in 
Natural 
Resources 


184    Distribution:  Net  or  Competitive  Profits 

nature  seems  adverse.  Moreover,  profits  in  any  given  in- 
dustry soon  invite  expansion  and  cause  their  own  extinction, 
unless  it  is  clearly  perceived  that  they  no  more  than  make  up 
for  losses  in  the  same  industry  in  other  years.  From  this  cause 
should  the  balance  turn  for  any  considerable  period  towards 
the  profits  side,  forces  would  be  set  in  operation  tending  to 
restore  the  equilibrium  and  to  make  profits  and  losses  in  each 
industry  offset  each  other. 

§  106.  In  a  comparatively  new  country  like  the  United 
Slates  an  important  source  of  profit  is  the  exploitation  of  vir- 
gin land  and  new  mineral  and  other  natural  resources.  As 
these  resources  are  opened  up  and  their  value  is  demonstrated 
the  incomes  to  which  they  give  rise  become  subject  more  and 
more  to  the  principles  determining  rent.  During  the  early 
stages  of  exploitation,  however,  they  are  too  irregular  and  un- 
certain to  be  classified  as  anything  else  than  profits  to  the 
enterprising  entrepreneurs  who  devote  time  and  means  to  their 
development. 

Profits  from  this  source  in  a  progressive  country  are  sure 
to  exceed  largely  losses  due  to  misdirected  investments.  At 
the  same  time  it  is  a  debatable  question  whether  in  some  highly 
speculative  ventures  concerned  with  the  exploitation  of  new 
resources,  such  as  gold  mining,  more  wealth  has  not  been 
wasted  in  the  fruitless  attempt  to  develop  paying  mines  where 
nature  has  created  none,  than  has  been  returned  in  profits  and 
rents  to  the  fortunate  entrepreneurs  who  have  made  rich 
strikes.  There  is  a  fascination  about  searching  for  mineral 
wealth,  and  especially  for  gold,  that  attracts  men  and  capital 
out  of  proportion  to  the  likelihood  of  success  in  such  enter- 
prises, and  though  it  may  not  be  true  as  often  alleged  that  every 
pound  of  gold  in  existence  has  cost  on  the  average  more  than 
it  is  worth,  this  certainly  approximates  the  truth. 

The  large  element  of  chance  that  figures  in  the  determina- 
tion of  profits  from  the  development  of  new  regions,  makes 
economic  desert  of  less  moment  here  than  in  connection  with 
other  species  of  profit.  This  is  particularly  true  in  connection 
with  the  mining  industry,  which  presents  numerous  examples 
of  able  men  toiling  through  their  whole  lives  for  a  scanty  and 
precarious  subsistence,  while  others,  having  neither  ability  nor 


The  liftcct  of  Changes  in  Wages  185 

training,  acquire  great  wealth.  There  can  be  no  question  that 
it  would  be  to  the  advantage  of  industrial  society,  if  the  re- 
turns to  entrepreneurs  in  these  industries  could  be  equalised 
without  lessening  the  motives  which  encourage  their  activity 
and  enterprise.  Society  could  hardly  undertake  to  share  the 
losses  of  those  who  make  unwise  investments,  as  this  would 
put  a  premium  on  folly,  but  it  has  been  argued  that  society 
may  properly  share  the  profits  of  those  whose  ventures  are 
successful.  Just  how  this  might  be  done  has  not  yet  been 
clearly  explained  by  advocates  of  the  policy. 

§  107.  In  the  foregoing  analysis  it  has  been  assumed  that  The 
the  rents,  wages,  and  interest  rates  that  entrepreneurs  must  ^^f  chan^'-e£ 
pay  are  fixed  by  general  market  conditions  and  may  not  be  '"  the 
changed  by  individual  entrepreneurs.     This  is  true  in  so  far  shares 
as  general  market  conditions  remain  stable,  but  when  these  are  o°  Profits 
changing,  as  they  usually  are  in  developing  countries,  when 
new  lands  are  being  brought  under  cultivation,  when  the  popu- 
lation is  growing,  and  when  capital  is  increasing,  then  rents, 
wages,  and  interest  rates  must  change  too,  and  there  is  oppor- 
tunity for  enterprising  entrepreneurs  to  hasten  or  resist  gen- 
eral tendencies  and  in  this  way  to  secure  for  a  time  profits 
above  the  wages  of  management.     A  few  examples  will  indi- 
cate how  profits  may  arise  from  these  sources. 

One  change  that  has  been  going  on  in  the  United  States  for  The 
several  generations  is  the  lowering  of  agricultural  rents  in  the  p  n  ^* 
Eastern  States  as  new  lands  have  been  developed  in  the  West.  Rents 
Aggressive  farmers  of  rented  farms  have  taken  the  initiative  in 
demanding  better  terms  as  economic  conditions  have  made  a 
fall  in  rents  inevitable.     By  so  doing  they  have  avoided  the 
losses  that  their  less  progressive  neighbours  sustain  by  con- 
senting to  renew  their  leases  on  the  same  terms  as  before.     In 
other   sections   where   rents   are    rising  the   more  aggressive 
tenant  farmers  refuse  to  pay  more  until  actually  compelled  to, 
and  in  this  way  keep  their  expenses  below  those  of  their  more 
tractable  neighbours. 

Similarly  there  have  been  general  movements  in  the  wages  Tlie 
that  competition  secures  to  different  grades  of  labour.     When  ciiances 
wage  rates  are  rising,  it  is  usually  possible  for  some  entrepre-  in  Wages 
neurs  to  resist  the  movement  for  a  time  and  in  this  wav  to 


1 86     Distribution:  Net  or  Competitive  Profits 

keep  down   their  expenses,  without  losing  any  considerable 
number  of  their  employees.     Eventually  they  must  accept  the 


higher  rates  or 


lose  their  men,  but  during  the  interval  that 


they  refuse  to  do  so,  they  may  reap  an  extra  profit.  On  the 
other  hand,  aggressive  entrepreneurs  lead  the  movement  to  re- 
duce wages  when  rates  are  tending  downwards  and  may  in  this 
way  cut  down  their  expenses  sooner  than  their  competitors,  whc 
receive  no  higher  prices  than  they  do  for  their  products.  In 
agreements  as  to  rates  of  interest  there  is  less  chance  for  over- 
reaching because  those  who  lend  and  those  who  borrow  are 
about  equally  conversant  with  the  conditions.  At  the  same 
time  even  here  some  entrepreneurs  gain  an  advantage  when 
rates  are  changing  by  making  better  terms  than  their  com- 
petitors. 

In  all  of  these  cases  prompt  adaptation  to  favourable  condi- 
tions or  grudging  acceptance  of  unfavourable  changes  only  at 
the  eleventh  hour,  give  rise  to  profits.  Failure  to  cut  down 
expenses  as  occasion  ofifers  or  too  ready  acquiescence  in  rising 
expenses  may,  on  the  other  hand,  cause  losses.  Taken  as  a 
whole  profit  and  loss  accounts  under  these  heads  are  likely  to 
about  offset  each  other  for  entrepreneurs  collectively. 

Summary  §  io8.  To  sum  up  what  has  been  said  in  reference  to  the 

different  sources  of  profits,  it  has  been  shown  that  their  pres- 
ence as  important  shares  in  distribution  is  due  to  the  fact  that 
changes  are  constantly  occurring  and  that  it  takes  time  for 
competition  to  adjust  economic  relations  to  changed  conditions. 
The  more  important  changes  from  which  profits  or  losses  arise 
have  been  described  as  price  fluctuations,  which  may  affect 
only  particular  commodities  or  the  prices  of  things  generally, 
the  introduction  of  new  goods,  improvements  in  the  methods 
of  producing  old  goods,  variations  in  climatic  and  other  natural 
conditions,  the  opening  up  of  new  lands  and  natural  resources, 
and  modifications  in  the  rates  of  remuneration  that  must  be 
paid  to  the  factors  of  production,  or  to  those  who  control  them. 

Conclusion  If  industrial  society  is  progressing  and  if  in  each  period 
there  is  more  wealth  to  be  divided  among  the  sharers  in  dis- 
tribution than  in  the  preceding  period,  a  large  part  of  the  in- 
crease will  appear  temporarily  as  extra  profits  going  to  entre- 
preneurs.    In  the  same  way,  when  industrial  society  is  retro- 


Conclusion  187 

gressing  the  loss  falls  first  upon  entrepreneurs.  Theirs  is  the 
elastic  share  that  increases  or  diminishes  readily  in  response  to 
changed  conditions.  But  whether  the  net  balance  happens  to 
be  above  or  below  the  wages  of  management,  competition 
among  entrepreneurs  themselves  is  a  force  which  tends  con- 
stantly to  make  their  gains  correspond  to  bare  wages.  Profits 
stimulate  them  to  bid  against  each  other  for  the  factors  of  pro- 
duction and  to  raise  rents,  wages,  and  interest  rates  until  ex- 
penses and  prices  are  again  equal.  Losses  lead  them  to  con- 
tract production  and  cut  down  expenses  until  in  this  way 
equality  is  restored.  Thus,  however  large  profits  or  losses 
may  be  at  any  given  time,  they  are  always  in  process  of  extinc- 
tion, always,  that  is,  unless  monopoly  influences  intervene  and 
prevent  the  forces  of  competition  from  accomplishing  their 
work  of  elimination. 

REFERENCES  FOR   COLLATERAL   READING 

*Marshall,Vr'\nc\^\e?,oi  Economics,  Book  VI.,  Chaps.  I.,  II.,  VII., 
and  VIII.;  *  Walker,  Political  Economy,  Part  IV.,  Chaps.  I.  and 
IV.;  *  Pier  son,  Principles  of  Economics,  Vol.  I.,  Part  I.,  Chap.  V.; 
*  Fetter,  Principles  of  Economics,  Chap.  31;  *Carver,  The  Distri- 
bution of  Wealth,  Chap.  VII. 


CHAPTER   XI 


DISTRIBUTION:   MONOPOLY    PROFITS 


The 

Nature  of 
Monopoly 


Distinction 
between 
Monopoly 
and  Dif- 
ferential 
Advantage 


§  109.  Monopoly  means  usually  in  economics  such  control 
over  the  supply  of  an  economic  good  as  enables  the  monopolist 
to  regulate  its  price.  This  regulation  is  of  course  never  abso- 
lute. It  must  always  have  regard  to  the  conditions  of  produc- 
tion and  the  extent  and  elasticity  of  consumers'  demand. 
Within  certain  limits,  however,  if  there  is  a  real  monopoly, 
control  is  effective  and  may  give  rise  to  monopoly  profits. 

A  distinction  which  it  is  important  to  note  at  the  outset  is 
that  between  monopoly  and  differential  advantage.  In  nearly 
every  branch  of  competitive  business  differential  advantages 
are  found.  In  farming  one  producer  of  wheat  uses  better 
land  than  another  producer.  In  manufacturing  one  mill  owner 
utilises  a  superior  source  of  water  power.  In  all  pursuits 
competitors  are  themselves  differently  endowed,  some  being 
more  capable  than  others  and  receiving  larger  returns,  al- 
though all  sell  the  same  goods  in  the  same  markets  at  the 
same  prices.  Although  important  sources  of  income  such  dif- 
ferential advantages  are  not  the  cause  of  monopoly  profits. 
The  fact  that  some  pieces  of  land  and  some  sources  of  power 
are  better  than  others,  does  not  prevent  an  active  compe- 
tition between  farmers  and  manufacturers  which  serves  to 
keep  prices  down  to  the  expenses  of  production  of  repre- 
sentative firms.  Equally  ineffectual  as  a  bar  to  active  com- 
petition are  the  personal  differences  between  men.  The  con- 
sideration of  the  influence  of  these  diff'erential  advantages  upon 
the  distribution  of  incomes,  belongs  under  the  head,  not  of 
monopoly,  but  of  rent  and  wages.  Only  when  competition  is 
suspended  and  one  firm  or  a  combination  of  firms  secures  such 
control  over  the  supply  that  it  may  regulate  the  price,  does 
monopoly  appear.  Its  essence  is  control  over  the  supply  and 
its  surest  indication  is  regulation  of  prices. 


The  Kinds  of  Monopoly  189 

The  above  definition  of  monopoly  refers  to  producers'  or  Buyers' 
sellers'  monopolies,  the  species  that  is  most  familiar  to  the  busi-  ^lonopolies 
ness  world.  Contrasted  with  it  are  buyers'  monopolies,  which 
rest  upon  control  over  demand  and  regulation  of  prices  from 
that  side.  In  practice  buyers'  monopolies  have  been  so 
unusual  that  they  merit  no  extended  consideration  in  this 
chapter. 

§  no.  The  following  are  the  principal  classes  of  monopolies  The 
which  are  of  interest  to   the   economist:    (i)    personal   mo-  j^/^^^^i 
nopolies;    (2)  legal  monopolies,  wiiich  may  be,  (a)  public  or 
(b)  private;  (3)  natural  monopolies  of  situation;  (4)  natural 
monopolies  of  organisation;   (5)   capitalistic  monopolies;   (6) 
labour  monopolies. 

A  personal  monopoly  arises  when  one  individual  controls  the  The  Im- 
supply  of  a  given  good  either  because  he  possesses  unique  ^l^^^^^^^t 
talent  (e.  g.,  an  artist's  monopoly  of  his  own  works),  or  be-  Kinds  of 
cause  he  uses  a  secret  process  so  superior  to  all  other  processes  in°the^ 
that  he  is  able  to  drive  all  competitors  from  the  field.     A  legal  United 
monopoly  is  one  based  upon  some  law  or  governmental  regu-      ^  ^^ 
lation.     Examples  of  public  legal  monopolies  are  furnished  by 
the  tobacco  monopoly  of  France,  the  salt  monopoly  of  Saxony, 
and  the  post-office  monopoly  of  the  United  States.    The  most 
familiar  private  legal  monopolies  are  those  based  on  patents, 
copyrights,  and  exclusive  franchises.     Natural  monopolies  of 
situation  are  of  two  kinds :  those  due  to  social  and  those  due 
to  physical  conditions.     Of  the  first  kind  are  the  monopolies 
which    the   single    village   blacksmith    and    storekeeper   enjoy 
until   competitors   enter  the   field.     More   important   are   mo- 
nopolies of  the  second  kind,  which  depend  upon  some  physical 
limitation  in  the  sources  of  supply  of  the  goods  controlled.    Of 
this  type  are  businesses  using  unique  mineral  springs  or  moun- 
tain passes,  or  controlling  the  whole  areas  from  which  certain 
commodities,  such  as  diamonds  in  Africa  or  anthracite  coal  in 
the  United  States,  are  obtained.  Natural  monopolies  of  organi- 
sation are  businesses  which  obey  a  law  of  diminishing  expense, 
no   matter   how    large   the   business   becomes.     Such   are   the 
railway    and    businesses   concerned    with    the    distribution    of 
letters,   telegrams,   parcels,   gas.   water  and   electrical   power. 
Capitalistic  monopolies  are  those  which  result  from  the  un- 


Monopoly 
vs.  Com- 
petitive 
industry 


190  Distribution  :  Monopoly  Profits 

hampered  power  of  large  aggregations  of  capital  and  are 
represented  in  the  United  States  by  the  so-called  trusts. 
Labour  monopolies  are  monopolies  resulting  from  combina- 
tions of  skilled  workmen  able  to  control  the  supply  of  the 
economic  good,  labour. 

When  all  of  the  businesses  in  a  country  like  the  United 
States  which  may  properly  be  classed  under  one  or  other  of  the 
above  heads  are  considered,  the  importance  of  monopoly  is 
more  likely  to  be  exaggerated  than  underrated.  Personal  mo- 
nopolies are  encountered  in  connection  with  all  artistic  and  pro- 
fessional work.  Although  not  usually  the  ground  for  very 
large  incomes  in  individual  cases,  thet  exert  in  the  aggregate 
a  considerable  influence  on  the  distribution  of  wealth.  Secret 
processes  are  not  at  present  the  source  of  very  great  monopoly 
returns  for  the  simple  reason  that  those  who  control  such 
processes  usually  prefer  to  have  their  monopolies  confirmed  by 
patent.  The  number  of  patented  processes  now  used  in  con- 
nection with  business  enterprises  may  be  inferred  from  the 
fact  that  from  1837  to  1900  the  United  States  issued  as  many 
as  675,561  patents.  Although  the  monopolies  to  which  patents 
give  rise  are  only  temporary,  in  a  country  in  which  processes 
are  so  soon  superseded  as  they  are  in  the  United  States,  they 
serve  to  give  a  monopolistic  character  to  nearly  every  branch 
of  manufacturing  business.  Businesses  enjoying  exclusive 
franchises  are  less  common,  but  on  the  other  hand  they  in- 
clude some  of  the  branches  of  production  that  are  most  vital  to 
the  general  well-being  such  as  water,  gas,  and  street  railway 
companies.  Natural  monopolies  of  situation  are  not  as  yet  very 
important,  but  they  appear  to  be  on  the  increase.  A  few  years 
ago  the  suggestion  that  a  single  corporation  could  monopolise 
the  iron-ore  and  coking-coal  resources  of  the  United  States 
would  have  been  greeted  with  incredulity.  Such  a  consumma- 
tion has  not  yet  been  realised  by  the  Steel  Trust,  but  its  prog- 
ress in  that  direction  must  make  economists  hesitate  to  impose 
any  limits  upon  the  possible  development  of  natural  monopolies 
of  this  type.  The  importance  of  natural  monopolies  of  organi- 
sation, which  embrace  the  chief  transportation  businesses  of  the 
country,  can  hardly  be  exaggerated.  Upon  them  all  other 
businesses  are  vitally  dependent,  and  this  dependence  increases 


The  Power  of  Substitution  191 

rather  than  decreases  as  production  becomes  more  concentrated 
and  the  division  of  labour  is  made  more  minute.  Finally,  the 
capitalistic  monopolies,  and  the  labour  monopolies,  which  are 
among  the  latest  fruits  of  the  country's  industrial  development, 
merit  all  of  the  attention  that  has  been  accorded  to  them.  If 
these  various  monopolies  were  quite  unhampered  in  their  con- 
trol over  the  prices  of  the  goods  they  produce  the  present 
might  well  be  styled  the  age  of  monopoly  rather  than  the  age 
of  competition.  But  such  control  is  subject  to  very  important 
limitations,  with  the  result  that  monopoly  is  more  of  a  form 
than  a  reality  for  the  greater  number  of  the  businesses  that 
have  been  enumerated. 

§  III.  The  most  important  limitations  on  the  power  of  a  Limita- 
monopolist  to  regulate  prices  are  three:    (i)    the   possibility  the"po\ver 
open  to  buyers  of  substituting  other  goods  for  those  which  of 
are  monopolised,  (2)  the  possibility  of  competition  which  may  '  °    ^ 
deprive  the  monopoly  of  its  control  of  the  supply,  (3)  the  pos- 
sibility of  legal  interference.     Taken  together  these  three  limi- 
tations confine  the  price-making  power  of  monopolies  within 
rather  narrow  limits  and  explain  the  fact  that  the  practical 
operation    of    monopolies    is    so    much    less    harmful    to    the 
interests  of  consumers  than  contemplation  of  the  nature  of 
monopoly  would  lead  one  to  expect. 

The  limitation  imposed  by  the  power  of  substitution  depends  The  Power 
upon  the  range  of  substitute  goods  open  to  buyers.  A  few  stitution 
examples  will  make  this  clear.  Suppose  that  the  monopolised 
good  is  a  particular  kind  of  wine.  Substitutes  for  it  are  all 
other  kinds  of  wine,  all  other  kinds  of  liquors,  even  all  other 
kinds  of  comforts  and  luxuries  so  far  as  wine  itself  is  in  this 
category.  An  attempt  to  increase  the  price  would  under  such 
circumstances  greatly  reduce  the  amount  of  wine  of  the  par- 
ticular brand  that  could  be  sold.  Unless  it  had  especially  en- 
deared itself  to  the  palates  of  consumers,  a  comparatively  small 
increase  in  its  price  would  spoil  its  market.  The  attempt  to 
double  the  price  might  even  divert  the  entire  demand  to  other 
goods.  In  such  a  case  the  effort  to  win  more  than  a  small  mar- 
gin of  monopoly  profit  from  consumers  would  be  fatal  to  the 
interests  of  the  monopolist. 

Again,  suppose  refined  sugar  to  be  the  monopolised  product. 


Sugar  an 
Example 


Substitu- 
tion  in 
Connection 
with  a 
Railroad 


Potential 
Competi- 
tion as  a 
Check  on 
Monopoly 


192  Distribution:  Monopoly  Profits 

The  customary  price  for  this  good  is  so  low  as  to  encourage  its 
general  consumption,  and  it  is  now  looked  upon  by  nearly  every- 
one as  a  necessary  of  life.  Moreover,  substitutes  for  it,  such 
as  raw  sugar,  molasses,  maple  syrup,  etc.,  are  few  and  unsatis- 
factory. The  range  for  substitution  is  so  narrow  in  this  case 
that  the  monopolist  may  make  considerable  changes  in  the  price 
without  seriously  affecting  the  demand.  In  fact,  if  the  price  is 
raised  the  demand  for  other  articles  is  more  likely  to  be  cur- 
tailed than  the  demand  for  sugar  itself.  Under  such  cir- 
cumstances the  conditions  as  regards  the  possibility  of  substi- 
tution are  peculiarly  favourable  to  monopoly  profit.  Fortu- 
nately for  consumers  they  are  less  favourable,  as  is  indicated 
below,  as  regards  the  possibility  of  competition. 

Take,  finally,  the  case  of  a  railway  which  furnishes  the  only 
available  outlet  to  the  market  for  a  given  district.  Its  rate- 
making  is  not  controlled  by  competition  in  the  ordinary  sense, 
but  its  patrons  have  always  the  alternative  of  not  prosecuting 
the  industries  whose  products  must  be  shipped  to  the  distant 
market.  Their  power  of  substitution  is  that  between  produc- 
ing for  rail  shipment  and  devoting  their  land,  labour,  and  capi- 
tal to  other  production.  In  practice  this  is  a  very  important 
limitation,  since  the  economical  administration  of  a  railway 
demands  a  large  volume  of  traffic,  and  a  road  cannot  afford  to 
make  its  rates  so  high  that  only  a  few  trains  will  be  run  over 
its  costly  roadbed  each  day.  At  the  same  time  in  many  locali- 
ties this  limitation  is  not  sufficient  to  insure  reasonable  rates, 
and  legal  interference  has  been  found  necessary  to  protect  the 
interests  of  the  public. 

The  possibility  of  exciting  competition  and  losing  control  of 
the  supply  is  an  ever-present  danger  to  capitalistic  monopolies 
and  in  less  degree  to  personal  and  natural  monopolies  of 
organisation.  This  has  been  illustrated  over  and  over  again 
in  connection  with  trusts  in  the  United  States.  An  example  is 
furnished  by  the  history  of  the  sugar  trust.  "  In  1887  the 
Trust  was  formed.  The  margin  of  profit  was  immediately 
raised  more  than  half  a  cent  a  pound,  at  times  even  fully  one 
cent  a  pound.  .  .  The  margin  fell  again  in  the  latter  part  of 
1889.  This  was  owing  to  the  fact  that  large  competing  re- 
fineries, especially  those  built  by  Claus   Spreckels  at   Phila- 


Competition  in  Connection  with  Railroads    193 

delphia,  had  entered  the  field.  For  rather  more  than  two  years, 
while  this  vigorous  competition  continued,  the  margin  fell  back 
to  a  point  substantially  as  low  as  had  existed  before  the  forma- 
tion of  the  Trust.  In  February,  1892,  the  Trust  bought  up  the 
competing  refineries  and  the  margin  was  at  once  put  back  to 
the  non-competitive  height.  From  the  years  1892  to  1898  the 
margin  remained,  relatively  speaking,  high.  .  .  In  the  latter 
part  of  1898  vigorous  competition  against  the  American 
Sugar  Refining  Company  (the  reorganised  Trust)  began  on 
the  part  of  Arbuckle  Brothers,  Claus  Doscher,  and  others."  * 
Similar  examples  might  be  cited  from  the  histories  of  combi- 
nations in  other  industries  showing  that  competition  is  an  ever- 
present  possibility  that  has  to  be  reckoned  with  by  the  man- 
agers of  capitalistic  monopolies. 

That  the  possibility  of  competition  is  a  limitation  on  the  The 
monopoly  of  the  village  blacksmith,  the  village  grocer,  etc.,  is  tife^sinele 
too  obvious  to  require  discussion.     So  long  as  these  business  Village 
men  keep  their  charges  down  to  fair  wages  of  management  '  '^^^ 
for  themselves  their  monopoly  of  these  businesses  may  be  undis- 
turbed.    Let  them  increase  their  charges,  however,  or  let  the 
village  grow  until  there  is  employment  enough  for  two  in 
these  lines,  and  a  competitor  is  sure  to  appear.    This  does  not 
mean  that  such   men   may  not  enjoy  monopoly  profits   from 
their  situation,  but  that  they  must  be  cautious  in  increasing 
their  charges  at  the  risk  of  losing  their  monopolies. 

Natural  monopolies  based  on  the  law  of  diminishing  expense  Competi- 
are  subject  to  the  same  check.     For  example,  in  the  railway  Connection 
business,  while  it  is  true  as  a  general  statement  that  one  com-  with 
pany  can  carry   freight  and  passengers  between  two  points     ^^  ^'^^ 
more  cheaply  than  could  two  companies  dividing  the  traffic  be- 
tween them,  it  is  also  true  that  the  difference  is  not  so  great 
that  unduly  high  rates  charged  by  the  first  company  will  not 
induce  capitalists  to  construct  a  parallel  road  to  compete  for 
the  business.    Such  competition  is  almost  always  uneconomical 
from  the  social  point  of  view,  but  the  history  of  railroad  build- 
ing in  the  United  States  is  full  of  evidence  to  show  that  it 
frequently  springs  up  and  acts  as  a  limitation  on  monopoly. 

*  Jenks,  T/ie  Trust  Preblem,  pp.  136-133. 


The  Fear 
of  Govern- 
mental In- 
terference 
a  Check  on 
Monopoly 


Conclusion 
in 

Reference 
to  Efficacy 
of  Checks 


The 
Law  of 
Monopoly 
Price 


A  Patented 
Brand  of 
Soap  as  an 
Example 


194  Distribution:  Monopoly  Profits 

The  last  limitation  referred  to,  that  is,  the  possibility  of  gov- 
ernment interference,  applies  especially  to  natural  and  capital- 
istic monopolies.  In  the  case  of  the  former  it  is  coming  to  be 
recognised  more  and  more  fully  that  competition  cannot  be 
relied  upon  to  regulate  the  businesses  affected  and  that  govern- 
ment interference  or  government  regulation  is  the  only  alterna- 
tive. How  far  this  conviction  has  found  expression  in  law  is 
considered  in  Chapter  XXIV.,  in  connection  with  the  discus- 
sion of  efforts  to  regulate  railways  in  the  United  States.  Gov- 
ernment interference  with  capitalistic  monopolies  or  trusts  has 
been  attempted  also  in  the  United  States  through  the  so-called 
anti-trust  acts  considered  in  Chapter  XXV. 

Summing  up  these  considerations  in  reference  to  limitations 
on  monopoly,  we  may  conclude  that  the  possibility  that  other 
goods  may  be  substituted  for  the  monopolised  product  applies 
to  all  monopolies,  but  with  a  force  varying  in  each  case  with 
the  range  of  substitutions  open  to  consumers.  The  possibility 
of  competition  threatens  all  except  personal  monopolies  of 
ability,  legal  monopolies,  and  natural  monopolies  of  location. 
Legal  interference,  finally,  has  actually  been  applied  to  natural 
and  capitalistic  monopolies.  These  three  limitations  serve  as 
effectual  checks  on  the  reckless  exercise  of  monopoly  power. 
Only  when  the  range  of  substitutions  open  to  consumers  is  nar- 
row and  the  obstacles  which  competitors  must  overcome,  in 
order  to  enter  the  field,  formidable,  does  monopoly  present  a 
serious  problem  or  is  legal  interference  necessary. 

§  112.  Monopolists,  so  far  as  they  are  free  to  obey  the  dic- 
tates of  self-interest,  tend  to  fix  those  prices  for  their  products 
which  will  yield  the  largest  monopoly  profits.  The  various 
circumstances  which  determine  what  these  prices  are  may  be 
made  to  appear  from  a  few  typical  examples. 

As  the  simplest  case  let  us  take  a  patented  article  in  general 
use  such  as  a  special  brand  of  soap  and  assume  that  the  ex- 
pense of  producing  and  selling  such  soap  is  five  cents  a  cake 
irrespective  of  the  amount  sold.  According  to  the  familiar 
law  of  demand  the  price  that  may  be  obtained  will  fall  as  the 
quantity  offered  for  sale  is  increased.  In  the  case  of  a  com- 
modity like  a  special  brand  of  soap  this  law  is  reinforced  by  the 
large  range  of  substitutions  open  to  consumers,  and  in  conse- 


Another  Case 


195 


quence  the  demand  responds  readily  to  changes  in  price.  Sup- 
pose that  the  vokime  of  sales  at  different  prices,  tlie  gross  re- 
ceipts, and  the  monopoly  profits  over  and  above  the  expenses  of 
production  stand  as  follows : 


No.  of 

'rice 

Cakes  Sold 

Gross  Receipts 

Expenses 

Profits 

SO(p 

100,000 

$   50,000 

$     5,000 

$  45,000 

40 

130,000 

52,000 

6,500 

45.500 

30 

200,000 

60,000 

10,000 

50,000 

25 

400,000 

100,000 

20,000 

80,000 

20 

600,000 

120,000 

30,000 

90,000 

15 

1,000,000 

150,000 

50,000 

100,000 

10 

2,500,000 

250,000 

125,000 

125,000 

9 

3,000,000 

270,000 

150,000 

120,000 

8 

3,500,000 

280,000 

175,000 

105,000 

7 

4,000,000 

280,000 

200,000 

80,000 

6 

6,000,000 

360,000 

300,000 

60,000 

Under  these  circumstances  it  is  evident  that  lowering  the  price 
tends  to  increase  the  monopoly  profits  by  successive  additions 
until  the  price  is  brought  to  ten  cents,  but  that  further  reduc- 
tions below  ten  cents  reduce  the  monopoly  profits.  Ten  cents 
is  thus  the  price  which  self-interest  will  lead  the  monopolist  to 
establish. 

In  the  above  case  it  has  been  arbitrarily  assumed  that  the  Another 
expense  of  production  is  constant  for  each  unit  of  product  no  ^^^ 
matter  how  many  units  are  produced.  A  more  probable  con- 
dition for  a  commodity  like  soap  is  for  the  expense  to  decrease 
as  the  volume  of  production  is  increased,  at  least  until  a  rather 
large  output  is  realised.  The  following  table  conforms  to  this 
assumption : 


No.  of 

Gross 

Expense 

Gross 

Price 

Cakes  Sold 

Receipts 

per  Cake 

Expenses 

Profits 

50«J 

100,000 

$   50,000 

l2j!J 

$   12,000 

$  38,000 

40 

130,000 

52,000 

11 

14,300 

37.700 

30 

200,000 

60,000 

10 

20,000 

40,000 

25 

400,000 

100,000 

8 

32,000 

68,000 

20 

600,000 

120,000 

7 

42,000 

78,000 

15 

1,000,000 

150,000 

6 

60,000 

90,000 

10 

2,500,000 

250,000 

5 

125,000 

125,00<i 

9 

3,000,000 

270,000 

4f 

145,000 

125,000 

8 

3,500,000 

280,000 

4^ 

165,000 

115 ,000 

7 

4,000,000 

280,000 

4f 

185,000 

95.000 

6 

6,000,000 

360,000 

4j 

270,000 

90,000 

Law  of 
Monopoly- 
Price 
Indicates 
the  Limit 
of  Price 
rather 
than  the 
Actual 
Price 


Complica- 
tions in 
Connection 
with 

Monopoly- 
Prices 


196  Distribution:  Monopoly  Profits 

Upon  the  conditions  assumed  in  this  example,  the  mo- 
nopoly profit  shows  a  tendency  to  increase  as  the  price  is  low- 
ered until  ten  cents  is  reached.  The  profit  at  nine  cents  is 
exactly  the  same  amount  as  the  profit  at  ten  cents.  Below  nine 
cents  the  profit  begins  to  fall  off,  so  a  further  lowering  of  the 
price  is  to  be  avoided.  In  this  case,  accordingly,  the  monopoly 
price  lies  between  nine  and  ten  cents. 

If  the  monopolist  enjoys  exclusive  control  of  the  monopo- 
lised good,  he  may  fix  the  price  at  the  point  affording  the 
maximum  profit  without  fear  of  exciting  competition.  But 
few  monopolists  are  so  fortunately  situated  as  this  implies. 
Competition,  even  though  not  in  active  operation,  is  an  ever- 
present  possibility  with  which  most  monopolists  must  reckon. 
Prudence  dictates  usually  a  more  conservative  policy  in  refer- 
ence to  prices  than  that  which  would  secure  for  the  time  being 
the  largest  monopoly  profits.  In  the  assumed  cases  the  price 
of  soap  is  likely  to  be  fixed  at  something  less  than  ten  cents,  in 
the  expectation  that  the  present  loss  in  profits  will  be  more  than 
made  good  by  the  protection  of  the  monopoly  from  future 
competition  that  it  insures.  In  the  same  way  fear  of  govern- 
mental regulation  often  checks  the  rapacity  of  monopolists  long 
before  such  regulation  is  actually  undertaken.  The  law  of 
monopoly  price  thus  indicates  the  extreme  limit  to  which 
monopolists  are  likely  to  go  in  fixing  prices  and  not  neces- 
sarily the  price  that  they  will  actually  charge  under  the  prac- 
tical limitations  which  control  their  conduct. 

§  113.  In  the  case  of  many  monopolised  products,  as  has 
been  pointed  out  by  Professor  Ely,*  there  are  different  strata 
of  demand  each  controlled  by  somewhat  different  considera- 
tions. This  also  may  be  illustrated  by  reference  to  the  demand 
for  such  a  commodity  as  soap.  Many  consumers  would  pre- 
fer to  pay  fifty  cents  a  cake  for  soap  if  they  believed  that  by 
so  doing  they  were  getting  a  better  article  than  their  neigh- 
bours. Taking  advantage  of  this  fact,  the  shrewd  monopolist 
of  a  particular  brand  of  soap  offers  several  different  grades 
for  sale  at  different  prices.  That  intended  for  the  mass  of 
consumers  is  put  out  under  the  firm  name  simply,  at  the  price 
— ten  cents,  say — calculated  to  aft'ord  the  maximum  monopoly 
*  Monopolies  and  Trtists,  Chapter  III, 


The  Law  of  Monopoly  Price  197 

return.  Along  with  this  is  oftcred  at  a  higher  price — say, 
twenty-five  cents — the  same  article,  coloured  a  little  differently 
or  pressed  into  a  different  shape,  which  is  designated, 
"  superior."  A  dash  of  inexpensive  scent  and  a  more  elaborate 
wrapper  transforms  "  superior  "  soap  into  "  superfine  "  and  in- 
sures a  limited  sale  at  fifty  cents  a  cake.  In  this  way  not  only 
is  a  larger  margin  of  profit  secured  on  the  supposedly  better 
grades,  but  consumers  are  reached  who  would  never  think  of 
buying  plain,  ordinary  soap  for  the  very  reasons  that  recom- 
mend it  to  less  fastidious  people. 

The  practice  of  offering  substantially  the  same  goods  at  dif-  Practice 
ferent  prices  is  by  no  means  confined  to  manufacturers  of  jjiffLrenf 
patented  toilet  articles.     It  is  found  in  connection  with  nearly  Prices  for 
every  kind  of  commodity  that  figures  in  personal  consumption.  Goods  Not 
Makers  of  bicycles  and  automobiles,  manufacturers  of  patented  Unusual 
foods  and  beverages,  fashionable  tailors  and  haberdashers,  and 
many  others  recognise  the  opportunity  for  profit  along  this  line, 
and  conduct  their  businesses  accordingly.    The  resulting  com- 
plication in  the  theory  of  monopoly  price  is  easily  understood 
from  what  has  already  been  said.     Instead  of  making  calcula- 
tions  in    reference   to   consumers'   demand   as   a   whole,   the 
monopolist  makes  special  calculations  in  regard  to  the  extent 
and  the  intensity  of  the  demand  of  each  class  of  consumers. 
He  offers  the  "  superfine  "  grade  of  his  product  at  a  price  com- 
mensurate   with    the    adjective    used    to    designate    it.     The 
"  superior  "  article  is  put  on  the  market  at  a  price  calculated  to 
attract  the  comfortable  middle  class,  which  appreciates  quality 
but  is  not  prepared  to  disregard  altogether  considerations  of 
expense.     Finally,  a  price  is  made  for  the  simple  article  which 
will  commend  it  to  the  rank  and  file  of  consumers  who  are  com- 
paring it  with  substitute  articles  and  anxiously  considering 
which  is,  on  the  wdiole,  the  best  for  the  money. 

The  law  of  monopoly  price  may  be  summed  up  in  the  maxim,  Final 

ask  that  price  which  is  calculated  to  yield  in  the  long  run  the  Statement 

,  ^        rr^      ,     •  ,         .  .....      nf  Law  of 

maxmium  monopoly  profit,      lo  decide  what  this  price  is  in  ^[onopoly 

any  given  instance,  the  monopolist  must  gauge  the  extent  and  r*rice 
intensity  of  consumers'  demand  both  as  a  whole  and  as  mani- 
fested by  different  classes  of  consumers.     He  must  then  calcu- 
late his  own  expenses  of  production  for  different  quantities  of 


Reasons 

for 

Concealing 

Monopoly 

Profits 


Methods 

of 

Concealing 

Monopoly 

Profits 


198  Distribution:  Monopoly  Profits 

the  monopolised  good.  His  first  concern  will  be  usually  to  put 
out  the  standard  grade  of  the  commodity  he  produces  at  a 
price  that  will  afford  the  largest  monopoly  profit.  This  may 
be  a  high  price,  but  if  the  demand  is  elastic  it  is  more  likely  to 
be  moderate  or  even  low,  especially  if  the  expenses  of  produc- 
tion per  unit  diminish  as  the  volume  produced  is  increased. 
Having  fixed  the  price  for  the  standard  grade,  the  monopolist 
will  consider  whether  it  would  not  be  profitable  to  offer 
superior,  superfine,  or  other  grades  to  particular  classes  of  con- 
sumers at  higher  prices.  In  connection  with  each  grade  he 
must  make  a  calculation  similar  to  that  origmally  made,  and 
he  must  also  consider  how  the  sales  of  these  superior  grades 
will  react  on  the  sales  of  the  good  of  standard  quality. 
Whether  he  will  put  out  special  grades  and  how  many  he  will 
put  out  will  depend  upon  the  special  character  of  the  demand 
for  his  product. 

§  114.  Monopoly  profits  have  never  been  looked  upon  with 
favour  in  the  United  States.  Even  the  suspicion  that  they  were 
being  enjoyed  has  sufficed  often  to  disturb  the  conditions  which 
made  them  possible,  either  because  consumers  have  combined 
to  boycott  the  monopolised  good  or  because  the  Government 
has  interfered.  Under  such  circumstances  it  has  been  but 
natural  for  monopolists  to  devise  numerous  expedients  for 
concealing  their  real  earnings. 

For  personal  monopolies  to  deceive  the  public  as  to  the  profit- 
ableness of  business  activity  is  an  easy  matter,  but  it  is  less  so 
for  corporations  with  monopoly  powers.  However  secretive  the 
latter  may  be  in  regard  to  their  methods  of  doing  business,  they 
are  compelled  on  sharing  their  earnings  among  their  stockhold- 
ers to  disclose  the  amount  of  these  earnings  to  a  number  of 
persons.  The  stock  of  a  small  corporation  may  be  so  narrowly 
held  that  secrecy  even  in  reference  to  dividends  is  possible,  but 
this  is  rarely  the  case  with  large  corporations.  The  latter 
can  conceal  their  profits  only  by  distributing  them  in  other 
forms  than  dividends  to  stockholders,  or  by  inflating  their 
capitalisation  so  that  large  dividends  may  be  paid  without  ex- 
ceeding a  moderate  rate  of  return  on  the  nominal  capitalisa- 
tion. A  few  words  may  be  said  about  each  of  these  methods. 
Directors  may  expend  surplus  earnings  for  additional  equip- 


The  Over-capitalisation  of  Monopolies      199 

ment,  patents,  or  other  property  at  greatly  inflated  valuations. 
By  this  means  monopoly  earnings  are  diverted  to  the  owners 
of  the  properties  purchased,  who  may  be  the  directors  them- 
selves or  their  friends.  This  method  may  conceal  the  monopoly 
profits  even  from  the  stockholders,  who  continue  to  receive  only 
moderate  dividends.  Somewhat  similar,  and  even  more  com- 
mon, is  the  practice  of  dividing  monopoly  profits  among  the 
higher  officials  of  the  monopolistic  corporation  in  the  form  of 
large  salaries.  It  is  a  familiar  fact  that  monopolies  are  good 
employers.  They  frequently  pay  wages  above  the  competitive 
rates  even  to  their  ordinary  workmen.  To  some  extent,  and 
perhaps  fully  as  regards  the  lower  grades  of  labour,  this  policy 
is  justified  by  the  better  service  that  It  secures.  It  is  not,  how- 
ever, confined  to  the  ordinary  grades  of  labour,  but  applies  in 
extreme  form  to  salaried  officials.  These  men  are  in  a  posi- 
tion to  bring  influences  to  bear  on  boards  of  directors  to  have 
their  salaries  increased  to  much  more  than  they  could  hope  to 
earn  if  they  were  engaged  in  competitive  industries.  Some- 
times they  are  themselves  large  stockholders  in  the  enterprises 
which  they  manage ;  at  others  their  knowledge  of  the  business 
may  be  valuable  to  the  corporation  because  they  are  in  posses- 
sion of  secrets  which  it  would  be  highly  disadvantageous  to 
have  made  public.  To  insure  their  continued  loyalty  to  the 
interests  of  the  monopoly  they  must  be  well  paid  for  their 
services.  On  these  and  other  grounds  monopoly  profits  are 
•often  hidden  in  salaries  much  above  what  entrepreneurs  direct- 
ing competitive  businesses  could  afiford  to  pay  for  similar 
grades  of  service. 

The  most  common  expedient  of  all  for  concealing  profits  is  The 
the  practice  of  inflating  the  capitalisation  of  the  corporation,  talitatkm^" 
Where  a  business  is  organised  by  shrewd  men  who  foresee  its  of  Monopo 
monopolistic  possibilities,  it  is  usual  to  start  with  a  grossly  in-  porations' 
flated  capitalisation.     In  the  railway  business,  for  example,  it 
has  not  been  unusual  to  secure  all  of  the  capital  required  by  the 
sale  of  bonds  and  to  distribute  the  stock  as  a  pure  bonus.     In- 
dustrial combinations  as  organised  in  the  United  States  accom- 
plish the  same  result  by  putting  out  preferred  stock  equiva- 
lent to  the  actual  capital  invested  in  the  business  and  an  equal 
or  even  larger  amount  of  common  stock  as  a  bonus.     In  these 


Stock 
Watering 


Difficulty 

of 

Measuring 

Monopoly 

Profits 


Funded 
Income 
Defined 


200         Distribution  :   Monopoly  Profits 

and  other  ways  the  nominal  capital  of  an  enterprise  may  be 
made  from  the  first,  two,  three,  or  even  five  or  ten  times  the 
amount  actually  invested  in  it.  Such  an  arrangement  permits 
directors  to  distribute  very  large  profits  as  dividends  on  the 
nominal  capital  without  exceeding  the  ordinary  rate  of  interest. 

It  often  happens,  even  when  large  monopoly  earnings  are 
anticipated,  that  the  nominal  capitalisation  is  not  made  large 
enough  to  conceal  them.  In  such  cases,  and  in  the  more  usual 
cases  in  which  actual  and  nominal  capitalisation  start  together, 
the  practice  of  "  watering  "  stock  to  conceal  excessive  earnings 
is  frequently  resorted  to.  This  consists  simply  in  issuing  new 
stock  for  which  no  equivalent  investment  is  required.  It  may 
be  accomplished  by  means  of  a  stock  dividend,  each  share- 
holder being  given  an  amount  of  new  stock  proportional  to  his 
original  holding ;  or  by  the  issue  of  new  stock  for  subscription 
at  a  nominal  price,  subscriptions  being  open  only  to  share- 
holders, directors,  or  other  favoured  investors.  By  these 
means  the  nominal  capitalisation  may  be  expanded  to  keep 
pace  with  earnings  and  to  permit  the  distribution  of  the  latter 
without  any  apparent  increase  in  the  dividend  rate. 

The  above  ways  of  concealing  monopoly  profits  have  been 
resorted  to  so  generally  by  monopolistic  corporations  in  the 
United  States  that  the  casual  student  of  the  reports  of  some 
of  the  most  successful  of  these  enterprises  would  never  suspect 
that  their  earnings  were  larger  than  those  of  competitive  busi- 
nesses. To  show  that  they  are  so  in  fact  requires  a  full  knowl- 
edge of  the  operations  of  such  corporations  from  the  time  they 
were  first  organised.  In  most  cases  such  knowledge  is  con- 
fined to  those  most  interested  to  keep  it  secret  and  in  conse- 
quence it  is  rarely  possible  for  an  impartial  investigator  to  de- 
termine what  part  of  the  earnings  of  a  monopolistic  enterprise 
represents  a  fair  interest  on  the  capital  actually  invested  in  it 
and  what  part  monopoly  profit. 

§  115.  One  consequence  of  the  policy  of  concealing  profits  is 
that  the  business  community  no  longer  regards  nominal  capital- 
isation as  a  fair  criterion  of  capital  value.  It  is  so  habituated 
to  the  practice  of  adjusting  capitalisation  to  earning  power  that 
it  readily  accepts  the  latter  as  the  real  test  of  wdiat  the  capital 
ought  to  be.     Thus  a  business  which  earns  $80,000  a  year  over 


Investors  and  Monopolies  201 

and  above  its  expenses  of  operation,  when  the  rate  of  interest 
on  investments  involving  similar  risks  is  8  per  cent.,  is  taken  to 
be  worth  $1,000,000,  without  much  reference  to  the  tangible 
capital  invested  in  it.  If  the  business  is  organised  as  a  cor- 
poration with  10,000  shares  of  capital  stock  the  shares  will  be 
quoted  at  $100.  This  procedure  may  be  described  as  capitalis- 
ing income.  Income  which  is  thus  capitalised  is  sometimes 
spoken  of  as  funded  income  to  distinguish  it  from  simple  inter- 
est on  capital  invested  in  competitive  industries.  The  monopoly 
profits  of  corporations  are  one,  but  by  no  means  the  only,  type 
of  funded  income. 

The  practice  of  capitalising  income  or  of  putting  valuations  The  Role 
on  monopolistic  and  other  sources  of  income  in  proportion  to  ..  jj\jj^j      t 
the  returns  which  they  afford,  gives  rise  to  vested  interests  in  Investor" 
the  established  order.     "  Innocent  investors  "   buy  shares  of  Connection 
stock  in  monopolistic  corporations,  paying  for  them  prices  pro-  with 
portioned  to  the  monopoly  earnings  that  are  being  realised,  and      ^"'^P*^  '^- 
then  claim  the  protection  of  the  government  against  reformers 
who  characterise  monopoly  profits  as  unearned  and  advocate 
their  confiscation.     The  advantage  of  this  kind  of  support  to 
promoters  of  monopolistic  undertakings  is  so  obvious  that  they 
not  infrequently,  especially  in  connection  with  local  monopolies, 
make  special  efforts  to  insure  the  wide  distribution  of  the  stock 
of  their  companies  in  the  localities  to  be  exploited.     If  persons 
of  light  and  leading  in  such  places  can  be  persuaded  to  be- 
come stockholders  the  likelihood  of  government  interference 
as  profits  grow  is  greatly  lessened.     In  time  innocent  invest- 
ors may  come  to  control  entirely  corporations  of  this  char- 
acter  through    the    silent    withdrawal    of    the    original    pro- 
moters to  other  fields.     Under  such  circumstances  the  claim 
that  the  monopoly   profits  are   no  more  than  a   fair   return 
on  their  bona  fide  investments  may  be  advanced  by  the  stock- 
holders with  much  force.     Most  of  the  older  natural  monopo- 
lies in  the  United  States  have  already  reached  this  stage.     Any 
proposal  to  curtail  their  monopoly  earnings  by  fixing  the  prices 
they  may  ask  for  their  services  or  by  requiring  from  them 
extraordinary  contributions  to  the  support  of  the  state  is  met 
by   the   objection   that   they   pay   no   larger   returns   to   those 
interested  than  competitive  businesses,  and  should  therefore  be 


Monopoly 
is  Not 
Necessarily 
Antago- 
nistic to 
Public 
Interest 


Desirable 
Monopolies 
Should  Be 
Regiilated 


Monopoly 
Proi^ts  Not 
Always 
Large 


202         Distribution  :  Monopoly  Profits 

no  more  subject  to  government  control  or  taxation  than  the 
latter.  How  serious  an  obstacle  this  argument  opposes  to 
efforts  to  secure  for  the  general  public  a  share  of  the  benefits  of 
monopoly  is  familiar  to  everyone  who  follows  current  discus- 
sions of  the  monopoly  problem. 

§  ii6.  There  is  a  widespread  impression  in  the  United 
States  that  monopolies  are  always  and  unalterably  opposed  to 
the  public  interest.  This  is  based  partly  on  experience  of  the 
bad  phases  of  monopoly  and  partly  on  the  teachings  of  jurists 
and  economists.  American  courts  uniformly  declare  monopoly, 
except  that  created  by  the  government  itself  in  the  exercise  of 
its  constitutional  powers,  illegal.  Economists  are  equally  prone 
to  characterise  monopoly  as  abnormal  and  to  extol  an  indus- 
trial system  of  free,  all-sided  competition,  as  that  best  calcu- 
lated to  promote  the  general  interest.  There  is,  of  course, 
good  reason  for  this  distrust  of  monopoly,  but  if  the  analysis 
we  have  given  of  the  different  kinds  of  monopolies  and  of  the 
restraints  under  which  they  exercise  their  powers  is  accurate, 
it  ought  not  to  be  extended  to  all  without  qualification.  For 
some  industries  monopoly  is  not  only  as  normal  and  inevitable 
as  is  competition  for  other  industries,  but  it  is  the  form  of 
organisation  that  best  serves  the  public  interest.  Natural 
monopolies  of  organisation,  for  example,  are  monopolies  be- 
cause as  such  they  can  produce  more  economically  than  could 
competing  firms.  For  them  the  monopoly  form  of  organisa- 
tion is  the  desirable  form,  which  should  be  encouraged  rather 
than  discouraged  by  those  who  have  the  public  interest  at 
heart. 

It  is  not  proposed  in  this  chapter  to  discuss  practical  phases 
of  the  monopoly  problem,  but  it  may  be  remarked  in  passing 
that  what  the  public  interest  requires  is  not  so  much  the  com- 
plete suppression  of  monopoly  as  the  suppression  of  monop- 
olies which  are  managed  with  sole  reference  to  monopoly 
profits.  Desirable  monopolies  should  be  fostered,  but  they 
need  also  often  to  be  regulated  if  they  are  to  render  the  largest 
social  service  of  which  they  are  capable. 

Another  misapprehension  that  is  current  is  that  monopoly 
always  means  large  monopoly  profits.  Perhaps  the  easiest  way 
to  dispel  this  illusion  is  to  call  attention  to  what  would  happen 


Monopoly  Profits  and  Other  Shares     203 

if  every  line  of  business  were  to  become  a  monopoly.  In  that 
case  the  combinations  of  entrepreneurs  controlling  different 
branches  of  production  would  be  no  better  ofi^,  so  far  as  profits 
are  concerned,  than  they  are  now,  when  most  lines  of  business 
are  competitive.  Their  efforts  to  raise  prices  would  be  coun- 
terbalanced by  similar  efforts  on  the  part  of  other  entrepre- 
neurs. This  must  be  the  case  because  exchange  values  are  at 
bottom  ratios,  and  efforts  to  enhance  both  terms  of  every  ex- 
change ratio  must  leave  them  very  much  as  they  were  before. 
No  more  wealth  would  be  produced  and  consequently  there 
would  be  no  more  to  distribute  as  profits  or  as  any  other  share. 
The  actual  situation  is,  of  course,  very  different  from  this 
assumed  case,  but  the  limitations  on  the  powers  of  monopolists 
which  it  presents  are  also  quite  effective.  The  power  con- 
sumers possess  of  substituting  other  goods  for  those  monopo- 
lised, and  the  danger  that  competition  will  be  excited,  are  ever- 
present  forces  that  confine  monopoly  profits  in  most  businesses 
within  narrow  limits. 

§  117.  Monopoly    was   expressly   excluded   from    what   we  The 
have  styled  the  state  of  normal  equilibrium,  not  because  it  is  ^^^i^^^c® 
considered  abnormal  or  even  unusual,  but  because  it  is  easier  Monoply 
to  trace  its  influence  when  it  is  studied  in  isolation.     In  actual  the  Other 
industrial  society  competitive  and  monopolistic  enterprises  are  Shares  in 
carried  on  side  by  side  and  act  and  react  upon  each  other,  ^q^ 
The  influence  of  monopoly  should  be  briefly  indicated  before 
we  turn  to  a  discussion  of  the  competitive  shares  of  income — 
rent,  wages,  and  interest — treated  in  the  following  chapters. 
To  secure  monopoly  profits  monopolists  must  fix  the  prices  of 
their  goods  somewhat  above  their  expenses  of  production.     In 
the  example  given  in  an  earlier  section  the  largest  monopoly 
profit  was  secured  when  the  price  of  the  patented  soap  was 
fixed  at  ten  cents.  The  expenses  of  production  for  the  2,500,000 
cakes  that  could  be  sold  at  that  price  averaged  only  five  cents, 
so  that  the  effect  of  the  monopoly  was  to  make  the  price  double 
what  it  would  have  been  had  competition  had  free  play.     To 
maintain  the  price  at  ten  cents  the  monopolist  must  of  course 
limit  production  to  the  2,500,000  cakes  which  the  public  will 
take  at  that  figure.     If  competition  forced  him  to  lower  the 
price  to  six  cents  he  could  produce  and  sell,  according  to  the 


Practical 

Phases  of 

Monopoly 

Problem 

Treated 

in  Later 

Chapters 


204         Distribution  :    Monopoly  Profits 

conditions  of  the  illustration,  6,000,000  cakes.  At  the  price 
corresponding  exactly  to  the  expenses  of  production,  hve  cents, 
he  could  sell  a  still  larger  product.  The  effect  of  monopoly  is,, 
accordingly,  to  reduce  the  amount  of  the  monopolised  good 
that  is  produced  and  sold  below  what  it  would  be  under  condi- 
tions of  free,  all-sided  competition.  Only  through  such  reduc- 
tion or  curtailment  of  the  supply  can  the  coveted  monopoly 
profit  be  secured.  But  reducing  the  output  of  the  monopo- 
lised good  involves  the  employment  by  the  monopolistic  enter- 
prise of  less  land,  labour,  and  capital  than  would  be  needed  in 
the  same  branch  of  production  if  competition  had  free  play. 
The  effect  of  monopoly  is  thus  to  increase  the  supplies  of  the 
factors  of  production  which  must  find  employment  in  competi- 
tive industries.  What  influence  this  mal-distribution  of  the 
factors  of  production  is  likely  to  have  on  the  shares  of  income,, 
rent,  wages,  and  interest,  can  only  be  explained  after  we  have 
considered  how  these  shares  are  determined.  Such  influence  is 
of  course  supplementary  to  the  tax  on  all  consumers  who  buy 
monopolised  products,  resulting  from  the  enhancement  of  their 
prices. 

The  phases  of  the  monopoly  problem  that  have  assumed 
greatest  importance  in  the  United  States  concern  legal  and 
natural  monopolies,  trusts,  and  labour  monopolies,  and  these 
are  treated  at  some  length  in  later  chapters  (XXL,  XXIII. , 
XXIV.,  and  XXV.).  The  reader  will  find  in  them  many 
concrete  details  and  illustrations  which  out  of  consideration 
for  space  have  been  omitted  from  the  preceding  sections. 


REFERENCES  FOR   COLLATERAL   READING 

^Marshal/,  Principles  of  Economics,  Book  V.,  Chap.  Xlll.;*Ely, 
Monopolies  and  Trusts,  Chaps.  I. -IV. ;  *  Bullock,  Introduction  to> 
the  Study  of  Economics,  Chap.  XL;  *  Fetter,  Principles  of  Eco- 
nomics, Chap.  33. 


CHAPTER   XII 
DISTRIBUTION  :   RENT 

S  Ii8.  In  the  precediner  chapters  the  more  or  less  irregular  Contrast 
"5  ^  ....  ,.  ,      %  between 

and  uncertain  shares  in  distribution  have  been  discussed.    Com-  Profits 

petitive  profits  rise  and  fall  and  for  entrepreneurs  as  a  whole,  |°^  Other 
except  in  periods  of  industrial  expansion,  are  as  likely  to  in  Dis- 
take  the  form  of  losses  as  of  gains.*  Monopoly  profits  are  tributiun 
more  stable  and  in  the  aggregate  constitute  an  important 
part  of  the  community's  income,  but  the  conditions  upon 
which  monopoly  depends  are  subject  to  change ;  the  tastes 
of  consumers  may  be  modified  or  substitute  articles  may  be 
put  upon  the  market ;  new  methods  of  production  may  be  de- 
vised which  deprive  the  monopoly  of  its  advantage,  or  the 
strong  arm  of  the  law  may  be  interposed  to  divert  monopoly 
profit  to  the  public  either  by  the  forcible  lowering  of  prices  or 
through  taxation.  In  these  and  other  ways  monopoly  profits 
may  be  reduced  or  entirely  cut  off  before  they  have  been 
enjoyed  for  any  long  term  of  years.  In  contrast  with  profits, 
the  elements  entering  into  the  normal  expenses  of  production 
— rent,  wages,  and  interest — are  regular  and  persistent.  Their 
payment  is  not  due  to  the  absence  of  competition,  but  is  the 
direct  consequence  of  the  activity  of  competitive  forces.  The 
keener  and  more  general  competition  is  the  more  certain  and 
definite  these  shares  become.  For  this  reason  in  explaining 
them  it  will  be  convenient  to  revert  often  to  the  relations  that 

*  The  German  economist,  von  Thiinen,  advanced  the  theory  that 
competive  profits  must  in  the  long  run  be  on  the  positive  side,  because 
entrepreneurs  take  great  risks  and  must  be  compensated  for  so  doing. 
This  depends,  obviously,  upon  whether  taking  risks  in  the  industrial 
society  under  consideration  is  distasteful.  In  the  United  States  there 
are  so  many  people  who  really  like  to  take  risks  that  compensation  for 
risk-taking  is  a  negligible  element  in  profits. 

205 


206 


Distribution  :    Rent 


The 
Nature 
of  Rent 


Problems 
Connected 
with  Rent 


The 
Source 
of  Rent 


The 

Principal 
Grades  of 
Land  Dis- 
tinguished 


would  prevail  in  an  industrial  society  brought  to  the  state  of 
normal  equilibrium.  In  such  a  society  the  relations  which 
economic  forces  tend  to  establish  in  the  actvial  industrial  world 
are  sharply  defined  and  may  be  easily  apprehended. 

§  119.  Rent  is  the  term  given  in  economics  to  the  share  of 
income  that  is  assigned  or  paid  to  owners  of  land,  sources  of 
water  power,  and  other  gifts  of  nature  which  assist  production, 
for  the  use  of  these  factors.  When  the  factor  is  used  by  the 
owner  himself,  rent  is  a  part  of  the  gross  return  that  he 
realises  from  his  year's  business  and  is,  economically,  as 
distinct  from  his  other  income  as  it  would  have  been  had 
he  leased  the  factor  at  a  stipulated  rental  from  some  other 
owner. 

A  complete  study  of  rent  involves  two  distinct  lines  of  in- 
quiry. First,  it  must  be  explained  why  rent  is  paid  and  what 
determines  its  amount.  These  are  purely  scientific  questions. 
Secondly,  it  must  be  considered  whether  the  present  system  of 
allowing  the  earnings  of  land  and  other  gifts  of  nature  to  go 
to  the  individuals  whom  the  law  designates  as  their  owners  is 
socially  defensible.  This  also  is  a  scientific  question,  but  its 
answer  depends  upon  moral,  political,  and  social  considerations 
which  are  still  matters  of  dispute  even  among  the  most  intel- 
ligent and  best-intentioned.  In  this  chapter  attention  is  con- 
fined to  the  explanation  of  rent. 

§  120.  The  source  of  rent  has  already  been  indicated  in  Chap- 
ter VI.,  Section  63.  It  was  there  shown  that  land  and  natural 
powers  assist  production  unequally  in  different  situations  and 
that  rent  is  what  entrepreneurs  pay  for  the  use  of  superior  land 
and  sources  of  power  to  equalise  conditions. 

In  a  country  like  the  United  States  land  is  divided  up  into 
hundreds  of  different  grades  to  be  applied  to  as  many  different 
productive  uses.  To  simplify  the  explanation  we  will  assume 
that  these  different  uses  of  land  may  be  included  under  five 
heads  as  follows :  Grade  A,  Sites  for  City  Stores ;  Grade  B, 
Sites  for  City  Residences ;  Grade  C,  Truck-farming  Plots ; 
Grade  D,  Wheat  Land ;  Grade  E,  Grazing  Land.  The  relation 
between  these  different  grades  of  land  may  be  represented  with- 
out great  inaccuracy  as  that  between  the  areas  enclosed  be- 
tween concentric  circles,  as  in  Figure  7. 


Plots  Devoted  to  Truck-farming        207 


Fig. 


At  the  centre  (A)  is  the  land  devoted  to  store  sites,  which  is 
economically  the  most  important  use.  For  purposes  of  trade 
central  situations  must  be  selected.  These  are  also  desirable 
for  residence  purposes,  but  inasmuch  as  a  residence  site  serves 
but  one  family,  while  a  store  site  serves  many  families  of  cus- 
tomers, the  store  use  triumphs. 

Next  to  the  store  sites  in  a  city  are  residence  sites  (B),  which, 
other  things  being  equal,  are  desirable  in  proportion  to  their 
nearness  to  the  business  centres.  Many  lots  are  just  on  the 
borderland  between  these  two  uses.  It  is  just  worth  while  for 
storekeepers  to  pay  a  little  higher  rent  for  them  than  they  com- 
mand as  residence  sites,  or  not  quite  worth  while. 

Beyond  the  residence  sites  are  plots  devoted  to  truck-farm- 
ing (C).  In  every  city  the  line  is  somewhat  roughly  drawn 
between  these  two  grades,  and  some  land  is  found  in  a  transi- 
tion stage  which  may  be  had  for  truck-farming  at  a  very 
moderate  rental  on  condition  that  the  lease  shall  be  terminable 
at  the  will  of  the  owner.  In  spite  of  this  complication  it  is 
not  difficult  to  find  city  lots  that  have  just  been  withdrawn  from 
use  for  farming  and  truck  farms  that  are  coming  to  be  so 
much  in  demand  for  residence  purposes  that  the  owners  are 
seriously  considering  giving  them  up  to  real-estate  operators. 
These  are  the  borderlands  between  grades  B  and  C. 


Store  Sites 


Residence 

Sites 


Plots 
Devoted 
to  Truck- 
farming 


208 


Distribution :    Rent 


Farm  Land 
Proper 


Grazing 
Land 


Fertility  as 
Important 
rsSituation 
in  Deter- 
mining 
Rent 


All  land  good  enough  and  near  enough  to  a  market  to  be 
used  for  truck-farming  might  be  used  for  the  cultivation  of 
some  staple  crop  like  wheat.  That  it  is  not  is  proof  that  truck- 
farming  causes  it  to  yield  a  higher  rent  than  would  wheat- 
farming.  Trucking  is  economically  a  more  important  use, 
chiefly  because  green  vegetables  will  not  stand  distant  trans- 
portation as  will  wheat  and  other  staples.  On  the  outer  cir- 
cumference of  the  belt  of  land  devoted  to  truck-farming 
will  be  foimd  acres  which  it  does  not  quite  pay  to  use  for 
this  purpose  and  which  are  cultivated  extensively  for  some 
staple  crop.  These  are  the  borderlands  between  grades  C 
and  D. 

The  transition  from  arable  fanning  to  grazing  occurs  simi- 
larly at  the  outer  circumference  of  the  lands  devoted  to  the 
growing  of  wheat.  Land  too  remote  or  too  poor  to  be  sowed 
with  a  wheat  crop  is  yet  well  adapted  to  the  grazing  industry 
and  may  afford  a  moderate  rental  in  comparison  with  the  land 
still  more  remote  and  still  poorer  which  it  barely  pays  to  de- 
vote even  to  this  economically  least  important  industry.  Be- 
yond this  last  land  at  the  circumference  of  the  grazing  belt  is 
still  more  land  (F)  that  in  the  country's  present  stage  of  in- 
dustrial development  is  economically  useless  and  therefore 
valueless.  Under  the  Homestead  Acts  lands  of  this  grade 
may  be  had  almost  free  of  charge  from  the  government. 
Practically  speaking,  it  is  no-rent  land,  and  so  long  as  any  con- 
siderable amount  of  it  remains  open  to  settlers  it  furnishes  a 
no-rent  margin  from  which  all  rent  is  calculated  in  the  man- 
ner described  below. 

In  this  classification  more  attention  has  been  given  to  situa- 
tion than  to  fertility  or  other  qualities  as  a  guide  to  grading 
lands,  because  it  is  the  phase  of  the  subject  most  apt  to  be  neg- 
lected. The  reader  scarcely  needs  to  be  reminded  that  the 
other  qualities  enumerated  in  Chapter  VI.  are  quite  as  potent 
factors  as  situation  in  determining  where  a  piece  of  land  be- 
longs in  the  economic  scale.  In  the  case  of  lands  whose 
products  are  of  high  value  in  proportion  to  their  bulk,  situa- 
tion counts  for  little  in  comparison  with  the  richness  of  the 
source  of  supply.  This  is  illustrated  by  the  fact  that  the  gold 
resources  of  the  Klondike  are  being  exploited  nearly  as  rapidly, 


Demand  for  Land  of  Different  Grades     209 

in  spite  of  the  remoteness  of  the  region,  as  those  of  Cripple 
Creek. 

§  121.  To  the  successive  grades  of  land  that  have  just  been  The 
described  the  reader  must  oppose  in  his  imagination  the  market  for  Land  ot 
for  the  goods  which  land  and  the  other  factors  of  production  L>ift"erent 
unite  to  produce.  First  comes  the  demand  for  lots  for  busi- 
ness purposes.  Entrepreneurs  appreciate  the  importance  of 
location  as  a  condition  to  business  success.  The  best  sites  are 
eagerly  taken  and,  as  the  community  grows,  new  lots  are  each 
year  withdrawn  from  their  old  use  as  residence  sites  because 
business  men  are  willing  to  pay  a  little  more  rent  for  them-. 
Improvements  on  the  land  interfere  somewhat  with  the  free 
play  of  this  tendency,  but  even  the  most  substantial  buildings 
decav  in  time  and  if  a  broad  view  be  taken  there  will  be  found 
enough  plots  to  pass  each  year  from  use  as  residence  sites  to 
use  as  store  sites  to  maintain  a  practical  equilibrium. 
Different  kinds  of  businesses,  railway  transportation,  whole- 
sale and  retail  trade,  banking,  etc.,  require  lots  in  different 
situations,  and  all  such  differences  have  their  influence  on  rents. 
We  shall  not  be  far  wrong,  however,  in  assuming  that 
business  men  require  centrally  located  lots,  the  lots  em- 
braced in  the  inner  circle,  A,  in  the  figure.  In  deciding  what 
rent  he  can  afford  to  pay  for  a  given  store  site,  the  entre- 
preneur never  thinks  of  comparing  it  with  farming  land 
on  the  outskirts  of  the  city.  He  knows  that  unless  he  estab- 
lishes himself  within  a  limited  area  he  might  as  well  not  go 
into  business.  To  him  marginal  lots  are  not  those  on  the  out- 
skirts of  civilization  which  he  could  get  for  nothing,  nor  even 
those  on  the  outskirts  of  the  town  whose  rent  is  low,  but  the 
choice  residence  lots  on  the  border  between  grades  A  and  B, 
for  which  he  must  pay  a  high  rent  because  of  the  demand  for 
them  for  residences.  To  this  marginal  rent,  which  all  entre- 
preneurs must  pay  for  lots  in  A,  is  added  a  dift'erential  rent 
for  the  better  lots  corresponding  to  their  superiority.  The 
choicest  lot  of  all  yields  the  highest  rent,  and  this  is  what  it 
adds  to  the  returns  of  a  representative  firm  for  a  given  outlay 
in  wages  and  interest  in  that  line  of  business  which  depends 
most  on  situation  for  its  success,  retail  trade.  The  practical 
determination  of  this  rent  is  a  matter  of  considerable  difficulty, 


2IO  Distribution:  Rent 

and  it  is  doubtful  if  the  exact  competitive  rent  is  ever  paid  for 
such  a  piece  of  land.  Something  approximating  this  amount  is 
paid,  however,  or  is  charged  to  the  account  of  rent  by  the 
entrepreneur  who  owns  the  site  on  which  his  business  is 
located.  From  this  maximum  the  rents  of  inferior  lots  de- 
crease to  the  marginal  rents  which  those  on  the  border  com- 
mand. In  each  case  rent  figures  as  one  of  the  expenses  of 
production  which  the  practical  business  man  counts  on  recov- 
ering in  the  price. 
Rent  The  determination  of  rents  of  residence  lots  is  effected  in 

Usually  a      exactly  the  same  way.     From  the  highest  rent  of  the  best  lot. 

Marginal       w'hich  corresponds  to  the  lowest  rent  for  a  lot  of  grade  A  land, 
as  well  as  a  ^       ,        , 

Differential  to  the  highest  rent  truck-farmers  are  willmg  to  pay  for  border 

Element  \qi^  between  B  and  C,  there  is  the  same  gradual  descent,  in- 
fluenced in  this  case  by  calculations  of  utility  rather  than  of 
business  returns.  To  the  extent  that  personal  considerations 
weigh  more  in  the  choice  of  homes  than  in  the  choice  of  busi- 
ness locations,  these  calculations  of  utility  are  variable,  but 
w'hen  we  are  considering  the  thousands  of  people  of  each  social 
class  that  make  up  a  city  population  these  personal  eccentrici- 
ties neutralise  each  other  and  may  be  disregarded.  For  those 
who  reside  in  cities  as  well  as  those  who  do  business  there  the 
choice  is  not  between  rent  and  no-rent,  but  between  high  rent 
and  marginal  rent.  Lots  to  be  had  for  nothing  are  so  far  away 
from  the  places  where  city  dwellers  earn  their  livelihoods  that 
they  are  worth  to  them  considerably  less  than  nothing. 
T'le  The  rent  paid  by  the  truck-farmer,  or  credited  by  him  to  his 

of  Rent  land  of  grade  C,  obeys  the  same  principles  that  have  been  out- 
lined. According  to  the  situation,  fertility,  etc.,  of  the  land  it 
pays  a  rent  ranging  betw'een  that  which  the  best  truck  land 
affords,  the  marginal  rent  for  grade  B,  and  the  rent  w'hich 
must  be  paid  for  the  borderland  between  C  and  D  to  keep  it 
from  the  wheat  farmer,  or  more  accurately  which  as  wdieat  land 
it  would  afford.  Similarly  the  wheat  farmer  pays  a  marginal 
rent  to  cover  what  the  poorest  wheat  land  would  be  worth  for 
grazing  purposes.  The  grazier  himself  is  surrounded  by  land 
of  a  still  lower  grade,  F,  which  is  still  in  the  category  of  free 
goods.  This  margin  is  accordingly  a  no-rent  margin  and  the 
price  of  his  product  need  under  normal  conditions  merely  cover 


Summary  of  Explanation  of  Rent       21 1 

the  expense  for  wages  and  interest  on  the  poorest  land  on 
which  cattle,  sheep,  and  horses  are  raised. 

From  this  explanation  it  appears  that  the  rent  paid  for  any 
piece  of  land  above  that  in  the  lowest  grade  includes  a  marginal 
and  a  differential  element.  It  must  be  as  high  as  the  rent 
earned  by  the  best  land  of  the  next  lower  grade  or  it  would 
itself  be  transferred  to  that  grade.  It  must  also  be  higher  than 
the  rent  paid  for  the  poorest  land  in  its  own  grade  by  an 
amount  corresponding  to  its  own  superiority  for  the  given 
purpose.  Only  grazing  land,  or  land  which  is  at  the  bottom 
of  the  economic  scale,  has  its  rent  determined  by  comparing  its 
properties  with  those  of  land  which  affords  no  rent  at  all.  The 
marginal  land  for  lands  of  higher  grades  is  always  a  rent- 
paying  land,  and  for  the  highest  grades  the  amount  of  rent 
paid  on  the  margin  is  very  considerable. 

§  122.  The  determination  of  rent  on  different  grades  of  land 
may  be  represented  graphically  by  the  following  figure ; 


Summary 
of  Ex- 
planation 
of  Reut 


Graphic 
Represen- 
tation of 
the  Theory 
of  Rent 


D  c"  C'    C 


Fig.  8. 


As  in  the  previous  section,  it  is  assumed  in  the  above  figure 
that  the  land  of  the  country  is  assigned  to  five  different  uses 


212 


Distribution :  Rent 


The  Rent 
of  Land  of 
Grade  D 


The 
Total  Rent 


Other 
Causes 
of  Rent 


ranging  in  importance  from  sites  for  business  blocks  to  ranches 
for  grazing  purposes.  At  the  margin  for  land  of  grade  E  the 
product,  or  the  purchasing  power  represented  by  the  product, 
will  just  cover  the  expenses  of  production  in  wages  and 
interest — allowing,  of  course,  for  the  replacement  of  capital 
goods — and  will  leave  nothing  over  for  rent,  since  it  is  no-rent 
land.  Representing  the  return  at  this  margin  for  each  unit  of 
labour  and  capital  by  the  length  of  the  line  B  C,  the  return  for 
a  like  outlay  on  better  grazing  land  should  be  represented  by 
longer  Imes  such  as  B'  C  or  B"  C".  If  all  land  used  for  grazing 
is  considered,  the  relation  between  the  whole  return  and  the  por- 
tion assigned  to  rent  will  be  represented  in  the  area  B  C  D  A. 
C  D  will  here  measure  the  number  of  units  of  labour  and 
capital  applied  to  all  land,  and  since  the  return  to  one  unit  on 
the  margin  is  B  C,  and  since  competition  will  tend  to  make  all 
accept  the  same  remuneration,  the  parallelogram  B  C  D  L  will 
represent  the  total  assigned  to  wages  and  interest,  and  the  tri- 
angle B  L  A  the  surplus  product  obtained  on  the  better  graz- 
ing land,  or  the  rent. 

The  marginal  land  of  grade  D  yields  a  return  to  each  unit  of 
labour  and  capital  equal  to  the  length  of  the  line  D  A,  since  it  is 
superior  grazing  land.  Of  this  return  L  D  remunerates  labour 
and  capital  and  L  A  constitutes  rent.  Representing  the  pro- 
duce of  all  of  the  land  of  grade  D  by  the  area  A  D  E  I,  we 
have  here  L  D  E  M  as  wages  and  interest  and  A  L  ]\I  I  as 
rent. 

The  division  of  the  product  obtained  from  lands  of  grade 
C,  B,  and  A  is  siinilarly  represented.  In  each  case  there  is  a 
considerable  rent  on  the  marginal  land  to  be  added  to  the  differ- 
ential rent  resulting  from  the  superiority  of  each  piece  of  land 
above  the  margin  for  the  particular  use  to  which  it  is  applied. 
The  whole  rent  of  land  is  represented  in  the  figure  by  the  area 
B  R  Y.  As  a  whole  it  is  a  differential  return  measured  from 
a  no-rent  margin  to  be  contrasted  with  wages  and  interest  de- 
termined, as  is  explained  in  the  following  chapters,  by  the  pro- 
ductiveness of  labour  and  capital  at  this  margin. 

§  123.  In  the  above  explanation  of  rent  attention  has  been 
confined  almost  exclusively  to  land  in  the  narrow  sense.  The 
rent  earned  by  sources  of  water  power  and  by  mines  is  deter- 


The  Rent  of  Mines  213 

mined  in  a  similar  way,  but  perhaps  deserves  separate  con- 
sideration. 

The  utilisation  of  water  power  involves  usually  a  consider-  The 
able  outlay  of  capital,  and  hence  the  marginal  powers  used  must  Jf^"'^  *^f 
afford  a  large  return  for  interest  on  the  capital  invested  even  of  Watur 
though  they  yield  no   rent.     In  connection  with  the  use  of  '^^^^^ 
water  power  situation  is  also  an  important  factor.     It  is  profit- 
able to  use  the  power  of  Niagara  because  it  is  surrounded  by  a 
rich  agricultural  and  manufacturing  country.     Much  cheaper 
sources  of  power  are  not  yet  utilised  west  of  the  Mississippi 
because  other  conditions  are  not  favourable  to  the  development 
of  industries  to  which  the  power  might  be  applied.     From  the 
marginal  source  of  power  in  use,  which  affords  no  rent,  the 
rents  of  superior  or  more  favourably  located  sources  of  power 
are  calculated  by  the  familiar  comparative  method.    Ordinarily 
water  power  is  utilised  by  the  entrepreneur  who  owns  it,  and 
hence  its  rent  appears  only  as  an  item  in  his  private  book- 
keeping.   Competing  with  water  power  are  steam  power,  horse 
power,  etc.     The  price  at  which  any  substitute  power  can  be 
obtained  for  the  performance  of  a  given  industrial  task  consti- 
tutes a  maximum  above  which  the  rent  of  water  power  can- 
not for  any  length  of  time  be  maintained. 

The  rent  of  mines  is  determined  in  the  same  way  as  the  rent  The  Rent 
of  land,  except  that  the  marginal  mine  is  not  necessarily  one  ^ii"es 
which  affords  no  rent.  Since  a  mine  will  not  renew  itself,  but 
by  each  year's  operations  is  depleted  of  so  much  of  its  ore,  the 
rational  owner  hesitates  to  work  his  mine  w^ien  it  barely  pays 
expenses.  The  ore  is  a  valuable  asset,  and  the  owner  is  short- 
sighted who  takes  it  out  to  sell  at  cost.  In  practice  this  con- 
sideration is  not  very  important.  Mining  is  so  uncertain 
that  in  nearly  every  branch  of  the  industry  mines  are  op- 
erated at  cost  or  even  at  a  loss  by  men  who  hope  that  the 
ore  will  get  richer  with  depth  or  that  the  price  of  the 
mineral  will  advance.  As  a  matter  of  fact,  therefore,  it  is 
usually  possible  to  find  no-rent  mines  producing  each  variety 
of  mineral  that  comes  out  of  the  earth.  The  rent  of  better 
mines  is  measured  up  from  them  as  a  no-rent  margin.  When 
mines  are  operated  under  lease  the  rent  is  usually  calculated  as 
a  royalty  proportioned  to  the  amount  of  ore  actually  removed 


214 


Distribution :  Rent 


Apparent 
Exceptions 
to  the  Law 
of  Rent 


The 

No-rent 
Margin 
Found  in 
Connection 
with 
Various 
Uses  of 
Land 


The 

Rotation 
of  Crops 
Compli- 
cates but 
Does  Not 
Contradict 
the  Law 
of  Rent 


from  the  ground.  Under  this  system  when  mines  are  operated 
literally  at  cost  in  wages  and  interest,  the  royalty  represents  an 
actual  loss  to  the  operator.  This  is  usually  an  effectual  bar  to 
the  operation  of  no-rent  mines  by  other  entrepreneurs  than 
those  who  own  them,  but  since  the  lease  system  is  excep- 
tional rather  than  the  rule,  this  does  not  prevent  the  presence 
of  no-rent  mines  in  nearly  every  branch  of  the  mining 
industry. 

§  124.  In  the  graphic  illustration  just  given,  land  is  repre- 
sented as  though  it  were  perfectly  graded  from  best  to  poorest, 
and  it  is  implied  that  the  location  of  a  given  piece  of  land  in  the 
particular  grade  to  which  it  belongs  is  a  simple  matter.  There 
are  several  well-known  facts  In  regard  to  land,  sources  of 
water  power,  and  mines  which  are  inconsistent  with  these 
assumptions,  and  we  should  now  inquire  whether  these  facts 
invalidate  the  explanation  of  rent  which  has  been  given : 

I.  There  is  not  merely  one  use  to  which  land  is  applied  down 
to  a  no-rent  margin,  but  several  uses.  In  the  United  States 
some  wheat  is  probably  raised  regularly  on  no-rent  land  and  a 
good  deal  of  corn  is  so  produced.  In  these  cases  the  rents  of 
better  wheat  and  corn  lands  are  measured  from  the  no-rent 
margin  just  as  are  those  of  the  better  grazing  lands.  Instead 
of  having  one  no-rent  margin  we  have  several,  but  their  col- 
lective influence  on  rent  is  no  different  from  that  traced  to  a 
single  one. 

II.  In  farming  in  the  United  States  the  tendency  is  more 
and  more  towards  the  diversification  of  crops.  No  one  crop  is 
raised  continuously,  but  different  crops  are  raised  in  rotation, 
and  the  productiveness  of  the  land  depends  not  upon  its  yield 
of  wheat  or  corn  or  cotton  alone,  but  upon  its  yield  of  all  of 
the  different  crops  grown  over  a  series  of  years.  Although 
this  greatly  complicates  the  rent  problem  it  does  not  change  the 
principles  upon  which  rent  depends.  The  tendency  is  still  to 
devote  each  piece  of  land  to  the  use  for  which  it  is  econom- 
ically best  adapted.  If  this  is  diversified  farming,  then  the 
average  return  in  the  different  crops  in  the  rotation  for  a  series 
of  years  must  be  calculated  and  made  the  basis  for  comparing 
it  with  other  pieces  of  land.  Through  the  indirect  process  de- 
scribed it  will  be  compared  finally  with  no-rent  land  on  the 


Basis  for  Calculating  Rent  215 

marc^in,  and  the  surplus  return  it  affords  in  comparison  with 
no-rcnt  land  will  be  its  rent. 

III.  No  piece  of  land  yields  exactly  the  same  return,  even  The 
though  cultivated  in  just  the  same  way,  two  years  together.  Re^urnthe 
The  weather  is  a  capricious  partner  upon  which  every  farmer  Basis  for 
depends,  and  as  a  result  of  weather  changes  large  crops  are  Kent 
sometimes  followed  by  small  crops  in  spite  of  everything  the 

farmer  can  do.  These  variations  affect  rent  only  by  making  it 
less  a  matter  of  mathematical  calculation  and  more  a  matter  of 
approximate  estimate.  Uncertain  as  is  the  outcome  of  each 
year's  farming,  the  average  return  for  a  series  of  years  may 
be  foretold  with  a  good  deal  of  accuracy.  It  is  these  averages 
that  should  be  and  are  considered  in  calculating  the  rent  prop- 
erly ascribable  to  a  piece  of  land. 

IV.  Some  pieces  of  land,  such  as  the  barren  rock  of  par-  Land  Fit 
ticular  lots  in  New  York  City,  are  well  adapted  to  one  purpose,  q"j^'  ^t'J^ 
but  unsuited  to  any  other.     Yet  the  absence  of  possible  sub-  ^lay 
stitute  uses  does  not  prevent  such  pieces  from  commanding  High  Reni 
often  very  high  rents.     This  is  no  real  exception  to  the  theory 

as  explained.  The  primary  cause  of  rent  is  the  demand  for 
land  for  industrial  uses.  If  the  possible  uses  are  arranged  in 
a  scale  in  the  order  of  their  importance,  then  the  best  land  for 
the  purpose  will  be  assigned  to  use  A  down  to  the  point  where 
a  given  piece  is  even  better  adapted  economically — will  yield  a 
larger  return — in  use  B.  That  some  pieces  admirably  suited  for 
use  A  would  not  serve  use  B  or  any  other  use  at  all  simply  les- 
sens the  requirements  for  land  for  use  A  that  will  serve  use  B. 
The  result  is  a  somewhat  lower  rent  margin  between  A  and  B 
which  communicates  itself  all  along  the  line.  Land  adapted 
for  one  purpose  only,  if  used  at  all,  is  of  necessity  devoted  to 
that  purpose  and  aft'ords  a  rent  depending  upon  the  way  in 
which  it  compares  with  marginal  land  used  for  the  same  pur- 
pose. If  it  is  the  only  land  for  the  purpose,  as  a  single  rock 
projecting  out  of  the  sea  is  sometimes  the  only  available  site 
for  a  lighthouse,  it  may  command  a  monopoly  rent  corre- 
sponding to  the  intensity  of  the  want  it  satisfies.  Unique  situa- 
tions of  this  sort  usually  belong  to  the  government  and  there- 
fore the  calculation  of  their  rent  is  of  little  practical  interest. 
There  are  other  apparent  exceptions  to  the  theory,  but  the 


2l6 


Distribution:  Rent 


Other 
Exceptions 

Obstacles 
to  the 
Exact 
Calculation 
ot  Rent 


Invest- 
ments of 
Capital  in 
Land 
and  Rent 


reader's  own  ingenuity  will  determine  whether  and  to  what 
extent  they  modify  it  in  operation. 

In  an  industrial  society  approaching  the  state  of  normal 
equilibrium  competition  would  assign  each  piece  of  land  to 
that  particular  use  for  which  it  was  best  adapted,  and  once 
assigned  each  piece  would  continue  to  be  used  for  the  same 
purpose  as  long  as  the  state  of  equilibrium  was  maintained. 
In  such  a  situation  rent  would  be  so  constant  that  its  calcula- 
tion would  be  a  very  simple  matter.  The  rent  problem  is  com- 
plex in  actual  industrial  society  because  pieces  of  land  are  con- 
stantly being  assigned  to  new  uses.  New  pieces  of  land  are 
being  brought  under  cultivation  or  are  being  improved  with 
buildings,  while  old  pieces  of  land  are  being  abandoned  or  the 
buildings  on  them  are  being  destroyed.  Under  these  circum- 
stances the  calculation  of  rent  can  be  at  best  but  an  approxi- 
mation, and  there  is  latitude  for  no  little  disagreement  as  to 
what  should  be  paid  for  or  credited  to  each  piece  of  land  that 
aids  in  production.  In  comparison  with  the  gross  amount  of 
rent,  however,  the  sums  involved  in  these  possible  variations 
are  small  and  may  without  serious  error  be  disregarded  when 
the  broader  problems  of  economics  are  under  consideration. 

§  125.  The  difficulty  of  distinguishing  between  land  and 
capital  in  the  form  of  permanent  improvements  has  already 
been  alluded  to.  Once  made,  investments  of  capital  in 
permanent  improvements  are  merged  in  the  land,  and  the  in- 
comes they  afford  obey  the  principles  just  laid  down  in 
reference  to  rent  rather  than  those  about  to  be  explained 
as  applying  to  interest.  For  example,  consider  the  return 
on  the  investment  of  capital  necessary  to  clear  land  and 
prepare  it  for  the  first  time  for  cultivation.  Unless  the  re- 
turn promises  to  be  large  enough  to  pay  the  current  rate  of 
interest  on  the  investment  it  will  not  ordinarily  be  made, 
but  after  it  has  been  made  the  cleared  land  affords  an  income 
in  no  wise  controlled  by  the  amount  of  the  investment.  All 
the  labour  of  New  England  farmers  during  the  seventeenth  and 
eighteenth  centuries  in  clearing  their  farms  of  stones  and  im- 
proving them  in  other  ways  did  not  avail  to  check  a  rapid  fall 
in  the  incomes  they  afforded  to  their  descendants  so  soon  as 
they  came  into  competition  with  the  better  lands  of  the  Miss- 


The  Capitalisation  of  Rent  217 

issippi  Valley.  The  abandoned  farms  of  the  former  section 
bear  eloquent  testimony  to  the  fact  that  interest  can  be  con- 
tinuously secured  only  for  capital  that  may  be  withdrawn 
and  reinvested  as  often  as  changes  in  industrial  conditions 
make  this  desirable.  As  soon  as  capital  becomes  embodied  in 
fixed  and  unalterable  capital  goods,  the  income  it  affords  ceases 
to  obey  the  principles  determining  interest  and  becomes  sub- 
ject to  the  law  of  rent.  Most  improvements,  however,  are  not 
fixed  and  unalterable,  but  wear  out  and  have  to  be  renewed. 
They  require,  therefore,  a  continuous  reinvestment  of  capital, 
which  will  only  be  made  on  condition  the  income  secured  cor- 
responds with  the  rate  of  interest  to  be  obtained  in  other  lines 
of  investment.  In  this  indirect  way  the  return  on  perishable 
improvements  is  adjusted  to  the  current  rate  of  interest. 

§  126.  In  Section  115,  Chapter  XL,  attention  was  called  to  The  Capi- 
the  business  man's  method  of  putting  a  price  upon  a  monopoly  ^£  Reat  ° 
or  any  other  fairly  permanent  source  of  income.  It  was  there 
shown  that  the  annual  return  from  the  monopoly  was  capital- 
ised at  the  current  rate  of  interest  and  that  the  result,  with 
ample  allowance  for  risk,  etc.,  was  the  amount  at  which  the 
monopoly  would  be  valued.  Exactly  the  same  method  is  ap- 
plied in  the  valuation  of  land.  The  rent,  less  deductions  for 
taxes  and  other  necessary  expenses,  is  capitalised  at  the  cur- 
rent rate  of  interest,  and  the  result  is  the  normal  price  of  the 
land,  about  which  its  market  price  fluctuates.  For  example, 
if  a  given  piece  of  land  is  found  by  experience  to  bring  in  on 
an  average  a  net  rent  of  $1200,  and  the  current  rate  of  interest 
is  6  per  cent.,  its  price  should  be  $20,000,  or  the  sum  which  in- 
vested at  6  per  cent,  would  yield  the  same  return.  If  the  rent 
is  only  $600  the  price  will  be  only  $ro,ooo.  On  the  other  hand, 
if  in  the  first  case  the  rate  of  interest  should  be  4  instead  of 
6  per  cent,  the  price  of  the  land  would  be  $30,000.  The  price 
of  land  thus  varies  directly  with  the  amount  of  its  rent  and 
inversely  with  the  rate  of  interest.  In  a  developing  country 
like  the  United  States  the  probability  is  so  strongly  in  favour 
of  an  increase  in  rents,  especially  in  the  case  of  city  lots,  that 
shrewd  investors  are  willing  to  accept  even  less  than  the  cur- 
rent rate  of  interest  from  their  investments  in  land.  In  such 
cases  the  present  value  of  a  lot  may  be  the  capitalised  value,  not 


2l8 


Distribution :  Rent 


Rent  a 

Funded 

Income 


Summary 
of  the 
Theory 
of  Rent: 

Its  Cause 


Includes 
Usually  a 
Marginal 
as  well  as  a 
Differential 
Element 


But 

May  Be 

Calculated 

from  the 

Intensive, 

No-rent 

Margin 


of  its  present,  but  of  its  prospective  rent.  Land  has  been  on  the 
whole  an  excellent  investment  in  the  United  States  during  the 
last  thirty  years,  in  part  because  the  rent  it  affords  has  so  gen- 
erally risen,  but  quite  as  much  because  the  rate  of  interest  has 
fallen  and  the  prices  of  pieces  of  land  have  risen  even  more 
than  the  rents.  The  latter  point  must  be  remembered  in  con- 
nection with  the  interpretation  of  statistics  showing  the  growth 
of  wealth.  In  countries  experiencing  a  declining  rate  of 
interest  there  is  an  appreciation  of  land  and  other  permanent 
sources  of  income  without  any  corresponding  change  in  the 
ability  of  these  factors  to  contribute  to  general  well-being. 

In  the  same  way  that  the  designation  "  funded  income  "  was 
applied  to  monopoly  profits  it  may  be  appropriately  applied  to 
rent.  Funded  income  differs  from  interest  in  that  the  latter  is 
in  proportion  to  the  amount  of  capital  actually  invested  in  an 
enterprise,  while  the  former  is  itself  the  basis  by  which  the 
capitalised  value  of  the  source  from  which  it  is  derived  is 
determined. 

§  127.  The  explanation  of  rent  that  is  given  in  this  chapter 
and  Chapter  VI.  may  be  summarised  as  follows : 

1.  Rent  is  an  income  which  arises  from  the  superior  pro- 
ductivity of  land  above  the  margin  in  comparison  with  that  at 
the  margin. 

2.  Marginal  land  for  some  of  the  uses  to  v/hich  land  is  put 
is  actually  no-rent  land.  More  commonly  the  marginal  land 
for  any  particular  use  itself  affords  a  rent  because,  though  mar- 
ginal for  the  given  use,  it  is  above  the  margin  for  some  other 
use  to  which  it  might  be  applied.  Rent  is  thus  composed 
usually  of  a  differential  and  of  a  marginal  element.  The  former 
is  an  expense  of  production  only  to  entrepreneurs  using  supe- 
rior land  for  the  given  purpose,  but  the  latter  must  be  paid  by 
all  entrepreneurs  engaged  in  the  given  branch  of  production 
and  hence  figures  as  an  element  in  the  normal  expense  of  pro- 
duction. 

3.  In  addition  to  the  extensive  margin  there  may  be,  and 
usually  is,  an  intensive  margin,  that  is,  a  use  of  land  resulting 
from  an  additional  investment  of  labour  and  capital  on  it 
which  affords  no  rent. 


The  intensive  margin  of  cultivation 


is  always  a  no-rent  margin. 


The  Alctaycr  System  219 

4.  Rent  is  measured  by  the  method  of  differences  starting  a  Surplus 

from  the  no-rent  land  margin  and  proceeding  from  grade  to  I"<-'ome 
grade  until  the  best  and  most  favourably  situated  lot  for  the 
purpose  that  is  economically  most  important  is  reached.  In 
the  aggregate  it  is  the  surplus  product  due  to  the  superiority 
of  the  land  to  which  it  is  credited  over  the  poorest  land  turned 
to  industrial  account  at  the  no-rent  margin. 

c;.  When  best  land  is  superabundant,  as  is  the  case  in  some  VvHiere 

newly  discovered  and  sparsely  settled  regions,  rent  docs  not  j^^^upe^" 

arise.  abundant 

6.  If  the  law  of  diminishing  returns  did  not  apply  to  land,  it  Law  of  Di- 
would  not  arise,  as  then  one  piece  of  land  would  serve  all  pur-  Returns  ^ 
poses  for  an  indefinitely  large  population. 

7.  The  income  yielded  by  permanent  improvements  on  land  Permanent 
obeys  the  same  law  as  income  ascribable  to  the  land  itself.  ments 

8.  The  price  of  a  piece  of  land,  together  with  permanent  im-  Price  of 

provements  embodied  in  it,  is  calculated  by  capitalising  its  net  p^"^^^"  j 

money  rent  at  the  current  rate  of  interest.     A  falling  rate  of  at  Current 

interest  tends,  therefore,  to  enhance  the  land  item  in  the  inven-  f-^}^  °^. 
'  _  '  Interest 

tory  of  a  community's  wealth. 

§  128.  In  the  foregoing  explanation  of  rent  the  share  of  the 
return  that  is  economically  ascribable  to  land   has  been  re- 
ferred to,  rather  than  the  commercial  rent  that  is  in  practice 
paid  to  landlords.     The  latter  is  determined  to  some  extent  by 
custom    and    personal    considerations    between    landlord    and 
tenant  and  rarely  corresponds  exactly  with  the  economic  rent.  Actual 
In  case  the  commercial  rent  is  less  than  the  economic  rent  a  Differs 
part  of  the  return  is  retained  by  the  tenant  as  a  gratuitous  ad-  from 
dition  to  his  income  from  the  labour  and  capital  he  may  have  tj^q^^ 
invested  in  his  business.    On  the  other  hand,  if  the  commercial 
rent  is  too  high  the  land  owner  gets  not  only  wdiat  the  land  is 
entitled  to,  but  also  a  part  of  the  return  which  should  go  to  the 
land  cultivator.     In  either  event  the  full  economic  rent  is  pres- 
ent as  a  part  of  the  income  shared  between  those  who  have  an 
interest  in  the  land  either  as  owner  or  as  user. 

The  most  familiar  mode   of  determining  commercial  rent  The 
without  much  regard  to  economic  principles  is  the  so-called  system 
metayer  system.    This  is  the  plan  by  which  the  cultivator  pays 
half  the  produce  of  the  year's  husbandry  to  the  land  owner. 


220 


Distribution :  Rent 


The 

Rent  of 

Buildings 

Distinct 

from 

Ground 

Rent 


Importance 
of  Rent  in 
the  United 
States 


who  furnishes  sometimes  also  seeds  and  tools,  and  retains  only 
the  other  half  for  himself.  Cultivating  land  "  on  shares " 
after  this  fashion  has  long  been  the  custom  in  European  coun- 
tries and  is  common  in  the  Southern  States  of  the  United 
States.  It  has  the  disadvantage  of  not  adapting  itself  readily 
to  changing  conditions  which  involve  changes  in  economic 
rent,  and  has  therefore  been  superseded  in  the  more  highly 
developed  sections  of  the  country  by  the  system  of  money 
rents. 

In  connection  with  the  rent  of  land  improved  by  the  erec- 
tion of  buildings  upon  it  business  men  are  in  the  habit  of  lump- 
ing together  into  one  sum  the  rent  of  the  land  and  the  interest 
on  the  capital  invested  in  the  buildings  and  calling  this  "  rent." 
When  a  distinction  is  made  between  the  two,  the  first,  or  rent 
proper,  is  called  the  ground  rent,  and  the  second  is  called  the 
rent  of  the  building.  It  would  be  an  aid  to  clearness  if  this 
mode  of  division  were  to  become  universal,  but  even  in  its  ab- 
sence an  expert  appraiser  can  usually  say  with  a  good  deal  of 
accuracy  how  much  of  the  gross  rent  for  a  built-over  lot  is  due 
to  the  building  and  how  much  to  the  lot  itself.  Economically 
the  two  returns  are  quite  distinct. 

§  129.  It  would  be  interesting  to  know  just  v/hat  part  of 
the  income  enjoyed  by  the  inhabitants  of  a  country  like  the 
United  States  is  properly  classified  as  economic  rent,  but  un- 
fortunately no  reliable  information  on  the  point  is  available. 
Most  of  the  land  of  the  country,  most  of  its  sources  of  water 
power,  and  most  of  its  mines  are  operated  by  owners  rather 
than  by  lessees.  In  consequence,  calculations  in  regard  to  rent 
are  largely  matters  of  private  bookkeeping,  and  are  made  with 
the  carelessness  which  business  men  permit  themselves  when 
they  come  to  divide  their  gross  profits  into  the  various  items 
which  economic  analysis  distinguishes.  Any  statement  in  re- 
gard to  rents  as  a  whole  must,  in  the  nature  of  the  case,  be  but  a 
rough  guess,  except  for  countries  like  Great  Britain,  where 
lands,  mines,  etc.,  are  commonly  operated  under  lease  and  the 
determination  of  rents  is  a  matter  in  which  two  parties  are 
interested. 

According  to  the  British  income  tax  returns,  the  total  income 


Rent  as  a  Source  of  Income  in  Great  Britain  22 1 

from  lands  in  the  United  Kingdom  in  1897  was  some  $275,-  Rent  as  a 

000,000.     This  did  not  inckide  the  income  from  mines,  quar-  income  in 

ries,  etc..  nor  ground  rents.    The  addition  of  these  items  would  t^rc^t 

Britain 
increase  the   total   to   about  $750,000,000,   which   was  about 

one-tenth  of  the  total  income  of  the  country.  The  total  income 
ascribable  to  rent  in  the  United  States  is  probably  less  in  pro- 
portion than  the  total  for  Great  Britain.  The  country  is  newer 
and  its  lowest  margin  of  cultivation  is  higher  than  the 
lowest  margin  for  the  much  more  densely  populated  mother 
country.  It  will  perhaps  be  not  far  from  the  truth  to  esti- 
mate the  rent  income  of  the  inhabitants  of  the  United  States 
at  from  one-fifteenth  to  one-twelfth  the  total  income  which  they 
enjoy.  The  payment  each  year  to  private  property  owners  of 
this  large  share  of  the  country's  income  for  services  rendered 
not  by  themselves,  but  by  their  property,  is  a  practice  vigorously 
condemned  by  many  intelligent  students  of  economics.  The 
most  radical  modification  in  the  present  system  that  has  been 
proposed  is  that  advocated  by  Henry  George  and  his  followers 
under  the  phrase  "  the  Single  Tax."  The  arguments  for  and 
against  this  proposal,  and  other  plans  for  solving  the  land 
problem,  are  considered  in  the  chapter  on  Plans  of  Economic 
Reform. 

REFERENCES  FOR   COLLATERAL   READING 

*  Afar  shall.  Book  VI.,  Chaps.  IX.  and  X.;  *  Walker, 'L&u^  and  Its 
Rent;  *Pierson,  Principles  of  Economics,  Part  I.,  Chaps.  II  and 
III.;  Nicholson,  Principles  of  Political  Economy,  Book  11.,  Chaps. 
VIII.  and  IX.;  /.  5.  Mill,  Principles  of  Political  Economy, 
Book  II.,  Chaps.  VI.-IX.,  and  XVI.;  */ohnson.  Rent  in  Modern 
Eccnoniic  Theory,  an  Essay  in  Distribution;  *Carver,  The  Dis- 
trib:i'^''.<i  of  Wealth,  Chap.  V. 


CHAPTER  XIII 


DISTRIBUTION:   WAGES 


Wages 
Defined 


The 

Wages 

Question 


§  130.  Wages,  as  the  term  is  used  in  economics,  include  all 
earnings  assigned  to  men  for  their  work,  from  lowest  piece 
wages  to  highest  annual  salaries  and  "  wages  of  manage- 
ment." From  the  point  of  view  of  production  wages  are  items 
in  the  normal  expense  involved  in  putting  goods  on  the  mar- 
ket. From  that  of  distribution  they  constitute  one  of  the 
great  shares  into  which  a  community's  income  of  goods  is 
divided. 

The  problem  of  explaining  wages  is  more  complex  than  that 
of  explaining  rent  because  it  has  to  do  more  directly  with  liv- 
ing men  and  women.  Like  the  latter  it  involves  an  explana- 
tion of  differences  in  earning  power  between  different  factors 
in  production.  In  the  United  States  some  workers  receive  as 
compensation  for  their  work  not  more  than  forty  cents  a  day, 
while  others  are  paid  salaries  of  $100,000  a  year  and  upwards. 
Such  differences  mvist  be  accounted  for  in  a  theory  of  wages. 
In  the  case  of  rent  an  explanation  of  differences  in  the  shares 
assigned  to  different  pieces  of  land  is  a  sufficient  explanation 
of  the  phenomenon  because  these  differences  are  measured  from 
marginal  land,  which  affords  no  rent.*  The  same  is  not  true  in 
the  case  of  wages.  Marginal  workmen  earn  something,  and 
after  all  differences  in  earnings  have  been  explained  it  still  re- 
mains to  account  for  marginal  or  least  earnings.  Another 
cause  of  difference  between  the  two  problems  is  that  while  the 
land  supply  of  a  country  is  relatively  fixed  and  unalterable,  its 
labour  supply  or  its  working  population  is  constantly  changing. 
The  continuance  year  after  year  of  high  rents  for  certain  pieces 
of  land  and  of  low  rents  for  others,  excites  no  surprise,  but  the 
continuance  of  differences  in  wages  seems  to  need  special  ex- 

*The   circumstances  which  determine  the  location  of  the  margin 
of  cultivation  must  also  be  explained,  of  course.     Cf.  Cliapter  XV. 

222 


Unequal  Capacities  of  Workmen        223 

planation.  Why,  as  generation  follows  generation,  are  not  all 
men  moulded  through  an  evolutionary  process  to  one  common 
type,  so  that  differences  in  earning  power  are  eliminated?  This 
is  a  third  distinct  question  presented  by  the  wages  problem. 
In  the  following  pages  an  explanation  of  the  causes  of  differ- 
ences in  wages  leads  up  to  a  discussion  of  the  reasons  for  the 
perpetuation  of  such  differences.  The  explanation  of  the  rate 
of  pay  that  goes  to  marginal  workmen  is  deferred  to  the  next 
chapter. 

§  131.  Most  differences  in  rates  of  wages  may  be  explained  Differences 
superficially  in  the  same  way  that  differences  in  rent  were  ex-  wages 

plained.     The  demand  of  consumers  calls  for  the  production  Due  to 

„  ,,,.,.,  Lnequal 

of  certam  goods.     Entrepreneurs,  taught  by  m^  mdustnal  ex-  Capacities 

perience  of  the  past,  determine  how  the  available  productive  ^^  ^^  ^^'^' 
factors  shall  be  correlated  for  the  purpose  of  satisfying  as  far 
as  possible  this  demand.  The  organisation  of  industry  which 
results  calls  for  workers  of  different  capacities  for  different 
tasks,  just  as  it  calls  for  different  grades  of  land.  These 
capacities  are  graded  according  to  their  economic  importance, 
which  depends,  on  the  one  hand,  upon  the  field  there  is  for 
their  exercise  and,  on  the  other,  upon  the  number  of  men  pos- 
sessing them  that  are  available.  Having  in  mind  present 
methods  of  production  and  the  present  working  population  of 
the  United  States,  we  may  distinguish  the  following  five  grades 
of  workers :  ( i )  men  having  superior  capacity  for  planning  and 
carrying  out  large  industrial  undertakings,  good  administra- 
tors, and  talented  artists  and  professional  men;  (2)  men  com- 
petent to  succeed  in  smaller  undertakings  or  to  administer  large 
affairs  as  subordinates,  artists  and  professional  men  of  aver- 
age ability,  and  highly  skilled  mechanics;  (3)  men  trained  for 
ordinary  clerical  or  mechanical  labour  ;  (4)  men  without  special 
training,  but  having  the  requisite  strength  and  endurance  for 
manual  labour ;  (5)  men  lacking  some  of  the  mental  or  physical 
qualities  essential  to  continuous  labour  of  any  kind.  This 
classification  is  illustrative  rather  than  exhaustive.  To  be 
complete  it  would  have  to  recognise  hundreds  of  different 
grades  of  productive  capacity  instead  of  five,  and  to  be  repeated 
for  each  territorial  division  of  the  country.  It  is  intended  to 
include  only  economic  men  and  women,  and  not  the  unfortu- 


224 


Distribution :  Wages 


Differences 
Deter- 
mined in 
Same  Way 
as  Rents 


The 

Relation 

between 

Members 

of  Different 

Groups 


nate  dependents  who  are  incapable  even  of  the  humblest  self- 
support. 

Just  as  in  the  land  scale  the  area  adapted  by  situation  and 
other  qualities  for  the  most  important  industrial  uses  is  exceed- 
ingly limited,  so  in  the  scale  of  workers  the  number  of  men 
fitted  for  the  highest  grades  of  labour  is  very  small.  In  each 
branch  of  production  and  in  each  profession  in  every  com- 
munity some  one  man  is  found  at  the  top.  Unique  capacity 
may  not  be  the  only  cause  of  the  ascendency  of  such  men,  but 
unless  it  is  present  they  will  not  be  able  for  any  length  of  time 
to  hold  their  positions.  Below  the  men  of  highest  capacity  for 
their  chosen  work  are  others  of  inferior  ability,  down  to  the 
marginal  men  in  the  group  who  find  it  just  worth  their  while 
to  continue  to  serve  in  their  particular  positions  rather  than  to 
take  up  alternative  employments  of  what  we  have  called  grade 
2.  The  earnings  of  the  abler  men  in  the  group  are  determined 
by  the  comparisons  that  are  constantly  being  made  between 
their  efficiency  and  that  of  the  marginal  men,  who  are  just 
induced  by  their  pay  to  stay  where  they  are  and  not  to  turn  to 
other  occupations.  Superior  men  receive  the  pay  of  the  mar- 
ginal men  and  in  addition  a  differential  corresponding  to  their 
superior  efficiency. 

The  earnings  of  workers  in  the  lower  grades  are  measured 
in  the  same  way  as  those  of  men  in  grade  i.  Competition  act- 
ing through,  and  also  upon,  entrepreneurs,  tends  to  assign  to 
each  worker  above  the  margin  in  grade  5,  wages  made  up  of 
both  a  marginal  and  a  differential  element.  The  marginal  ele- 
ment is  what  the  poorest  worker  in  the  group  could  earn  in  the 
best-paid  alternative  employment  open  to  him.  Unless  this  at 
least  is  paid,  the  alternative  occupation  will  be  preferred  and 
the  scale  will  have  to  be  readjusted.  Here,  as  in  the  case  of 
pieces  of  land,  individuals  without  any  power  of  substitution, 
but  who  are  proficient  in  their  special  tasks  in  comparison  with 
others  doing  the  same  tasks  and  having  such  a  power,  are  as 
well  off  as  though  they  had  it  themselves.  For  example,  if  of 
a  number  of  college  professors  receiving  salaries  of  $4000  a 
year  each,  some  could  earn  as  much  or  more  in  business  posi- 
tions and  were  hesitating  whether  to  make  the  change,  their 
power  of  substitution  would  serv^e  to  oppose  effectually  any 


Diftcrcnt  Grades  Overlap  225 

effort  to  reduce  professors'  salaries  even  though  the  others 
were  quite  unfit  for  any  other  kind  of  high-grade  work  than 
that  they  were  doing. 

In  addition  to  this  marginal  element  there  is  a  differential  Tendency 
element  corresponding  to  the  superiority  of  each  worker  in  his  Uniformitv 
grade.     In  practice  the  determination  of  this  differential  ele-  of  Wages 
ment  in  wages  is  a  complex  process  except  where  piece-wages  q^^^q 
are  paid,  when  it  adjusts  itself  automatically.    There  is  a  tend- 
ency for  whole  groups  of  workmen,  especially  those  organised 
in  trade  unions,  to  demand  uniform  wages.     This  policy  pre- 
vents employers  from  hiring  workers  who  do  not  come  up  to  a 
certain  standard  of  efficiency,   but  it  also  prevents  superior 
workmen  from  receiving  the  differential  wages  to  which  they 
are  economically  entitled.     In  the  occupations  in  which  uni- 
form wages  for  all  workmen  of  each  grade  prevail,  however, 
the  work  is  usually  so  simple  that  individual  dift'erences  count 
for  relatively  little  and  the  differential  wages  which  would  re- 
sult if  competition  were  entirely  free  are  a  negligible  element. 

§  132.  The  above  analysis  implies  that  the  world's  workers  The 
may  be  arranged  in  a  gradually  descending  scale  and  that  there  Grades^ 
are  no  breaks  separating  adjacent  individuals  and  classes.     It  into  which 
is  assumed  that  men  doing  the  same  kinds  of  work  may  be  ^^^ 
compared  readily,  so  that  the  differential  wages  to  which  they  Divided 
are  entitled  may  be  determined ;  also  that  the  marginal  men  in     ^ 
each  employment  are  just  held  where  they  are  by  the  payment 
of  as  high  or  slightly  higher  wages  than  they  could  earn  in 
alternative   employments.     While   this    is   true   as    a   general 
picture,  it  must  be  admitted  that  the  step  from  one  employment 
to  that  next  higher  in  the  scale  is  often  a  long  one.     This 
is  particularly  the  case  with  the  step  from  the  tasks  of  un- 
skilled to  those  of  skilled  workers  and  with  that  from  skilled 
manual  workers  to  brain  workers.    Instead  of  saying  that  there 
is  one  scale  of  workers,  it  would  be  more  accurate  to  say  that 
there  are  three  different  scales.     The  scale  for  brain  workers 
begins  at  the  highest  point  and  breaks  off  not  just  where  the 
scale  for  skilled  manual  workers  begins,  but  somewhat  lower. 
That  is  to  say,  the  compensation  of  brain  workers  of  the  lower 
grades  is  no  greater  than  that  of  manual  workers  of  the  higher 
grades.     In  the  same  way  the  scale  for  unskilled  workmen. 


226 


Distribution  :  Wages 


Workmen 
below  the 
Margin  of 
Their 
Group 


In  Practice 
the 

Number  of 
Grades  of 
Workmen 
is  Very 
Large' 


which  begins  low  down,  runs  parallel  to  the  scale  for  skilled 
workmen  of  the  lower  grades  for  a  time  and  then  continues  to 
the  lowest  margin.  Unskilled  workmen  of  the  higher  grades 
earn  as  high  wages  as  skilled  workmen  of  the  lower  grades.  It 
follows  that  the  alternatives  open  to  brain  workers  towards  the 
lower  end  of  the  scale  are  a  lower  grade  of  brain  work  or  a 
comparatively  high  grade  of  skilled  labour,  and  those  open  to 
skilled  workmen  of  low  grade  are  still  inferior  skilled  or  com- 
paratively high-grade  unskilled  labour. 

Another  qualification  that  should  be  added  to  the  analysis  of 
the  preceding  section  refers  to  the  assumption  that  the  least 
efficient  or  marginal  workers  in  each  group  have  alternative 
occupations  which  maintain  the  level  of  their  earnings.  This 
is  usually  but  not  always  true.  Just  as  it  frequently  happens 
that  men  who  are  superior  in  their  given  branch  are  competent 
to  do  nothing  else,  so  it  sometimes  happens  that  men  competent 
to  do  nothing  else  are  at  the  very  margin  of  efficiency  for  the 
work  they  perform.  The  earnings  of  such  marginal  men  are 
fixed  by  a  comparison  of  their  work  with  that  of  abler  men  in 
the  same  branch  of  production  to  whom  alternative  branches 
are  open.  The  options  of  the  latter  fix  the  return  for  that  class 
of  services  to  all  the  workers  in  their  group.  In  extreme  cases, 
as,  for  example,  in  the  sweating  industries,  it  sometimes  hap- 
pens that  a  group  of  workers  competent  to  do  all  of  the  work  of 
a  given  sort  for  which  there  is  a  demand  are  competent  to  do 
only  that  kind  of  work.  Under  such  circumstances  competition 
within  the  group  may  reduce  wages  to  a  starvation  level  and 
keep  them  there  until  the  demand  for  the  product  increases, 
the  number  in  the  group  is  reduced,  or  alternative  occupations 
are  opened  to  some  or  all  of  the  individuals  affected. 

§  133.  The  assumption  that  the  working  population  of  a 
country  like  the  United  States  is  divided  up  into  a  few  groups 
is  helpful,  but  as  already  intimated  the  actual  number  of  groups 
is  legion.  In  recapitulating  the  explanation  of  differences  in 
wages  it  will  be  well  to  think  of  the  labour  market  with  all  of 
its  complexities.  On  one  side,  then,  is  the  scale  of  tasks  to  be 
performed,  determined  in  part  by  the  demand  of  consumers  for 
goods  and  in  part  by  the  organisation  of  the  productive  factors 
adopted  after  generations  of  industrial  experiment.     On  the 


Marginal  and  Higher  Wages  227 

other  is  the  working  population  divided  up  into  hundreds  of 
different  groups  corresponding  to  the  diverse  tasks  to  be  per- 
formed. The  wages  paid  to  those  performing  the  tasks 
highest  in  the  economic  scale  are  high.  They  must  be  so  to 
keep  such  men  from  other  tasks  they  might  undertake  and 
also  to  induce  them  to  serve  one  employer  rather  than  another 
in  their  particular  tasks.  The  former  possibility  fixes  a  mar- 
ginal wage  which  all  men  performing  the  given  sort  of  work 
must  receive.  Competition  among  employers  adds  to  this  mar- 
ginal wage  a  differential  element  measuring  roughly  the 
superiority  of  the  better  men  over  those  who  are  just  good 
enough  to  be  retained  in  their  positions.  As  the  scale  descends 
from  group  to  group  similar  relations  are  found  to  prevail  .at 
every  point.  Each  man's  w'ages  contain  a  marginal  element 
determined  by  his  own  power  of  substitution  or  by  that  of  some 
other  w'orker  in  the  same  group.  If  he  is  superior  to  the  mar- 
ginal men  of  his  group  his  wages  will  be  higher  by  a  differen- 
tial element  roughly  gauging  his  superiority.  If  inferior,  as 
sometimes  happens,  his  differential  will  be  in  the  form  of  a 
deduction  from  the  wages  which  more  capable  men  doing  the 
same  sort  of  work  and  with  the  power  of  substitution 
receive. 

At  the  lower  end  of  the  scale  marginal  wages  will  be  received  J}^f  Causal 
,  •  ,  ,  •       ,  ,         ,..,.,  .  ,  Relation 

which  are  not  determmed  by  what  is  paid  in  alternative  employ-  between 

ments  because  there  are  none,  or  at  least  none  in  which  workers  ^^^J"^i"^,^ 

'  .  and  Higher 

are  actually  employed.  From  these  lowest  wages,  which  are  Wages 
still  to  be  accounted  for,  all  higher  wages  are  at  last  analysis 
measured.  They  are  a  minimum  to  which  the  differential  in 
the  lowest  group  is  added  to  determine  the  marginal  earnings 
enjoyed  in  the  next  higher  group.  To  this  another  differen- 
tial is  added  in  the  next  higher  group  to  determine  the  next 
higher  margin,  which  figures  in  turn  with  another  differential 
in  determining  a  third  margin.  Thus  by  successive  steps,  like 
a  flight  of  stairs  broken  by  frequent  landings,  the  highest 
earnings  of  all  are  finally  attained.  Although  measured  from 
the  lowest  margin,  the  wages  paid  at  the  top  of  the  scale  can- 
not be  said  to  be  determined  by  those  paid  at  the  bottom.  In 
a  progressive  community  it  w'ould  be  more  accurate  to  say  that 
the  wages  paid  at  the  bottom  are  determined  by  what  is  paid  at 


228 


Distribution  :  Wages 


The  Rate 
of  Wages 
Depends 
on  Demand 
and  Supply 
for 

Workmen 
of  Each 
Given 
Grade 


Differences 
in  Wages 
Perpetu- 
ated by  the 
Immobility 
of  Labour 


the  top.  The  tendency  is  upv^^ard  rather  than  downward.  Men 
are  being  drawn  up  from  group  to  group  and  the  lowest  mar- 
gin is  itself  rising.  The  important  point  at  this  stage  of  the 
explanation  of  wages,  however,  is  to  perceive  clearly  the  con- 
nection between  the  rates  paid  for  different  kinds  of  work 
rather  than  to  understand  their  ultimate  causes. 

In  conclusion  it  should  be  emphasised  that  the  earning  power 
of  each  worker  depends  on  two  circumstances  neither  one  of 
which  should  be  lost  sight  of  in  a  discussion  of  wages.  These 
are  the  appreciation  in  which  the  goods  he  helps  to  produce  are 
held  by  consumers  and  the  number  of  workers  competent  to 
engage  in  such  production  as  his  competitors.  Rare  combina- 
tions of  industrial  qualities  command  high  wages  if  the  goods 
that  may  be  produced  through  them  are  in  demand,  but  other- 
wise not.  Even  rather  common  combinations  of  qualities  may 
command  high  wages  if  the  field  for  their  exercise  is  large. 
The  highest  earnings  go  to  those  who  have  unusual  qualities 
for  which  there  is  great  demand.  On  the  other  hand,  the 
lowest  go  to  men  who  have  only  ordinary  abilities  of  a  sort  for 
which  the  demand  is  limited.  Great  administrators,  like  rail- 
road presidents,  get  high  salaries  because  there  are  many  posi- 
tions to  be  filled  and  few  men  competent  to  fill  them.  Sewing 
women,  on  the  other  hand,  earn  verv  little  because  there  is  little 
work  for  them  to  do  in  comparison  with  the  number  ready  to 
do  it.  In  neither  case  is  the  difficulty  or  ease  of  the  work  to 
be  done  the  chief  influence  determining  the  pay  w'hich  it  com- 
mands. A  multiplication  of  the  men  competent  to  be  good 
railroad  presidents  would  serve  to  reduce  the  salaries  attached 
to  such  positions,  even  though  there  was  not  the  least  change 
in  the  nature  of  the  work  required.  In  the  same  way,  a  reduc- 
tion in  the  number  of  sewing  women  would  serv^e  to  increase 
the  earnings  of  those  who  remained,  although  they  worked  no 
longer  or  better  than  form.erly. 

§  134.  Competition  tends  to  bring  the  wages  of  workers  hav- 
ing the  same  industrial  qualities  to  a  level  within  each  labour 
market,  just  as  it  serves  to  cause  identical  goods  within  a  goods 
market  to  sell  for  the  same  prices.  A  labour  market  is,  how- 
ever, more  restricted  than  a  goods  market.  As  Adam  Smith 
long  ago  remarked,  "  a  man  is  of  all  sorts  of  luggage  the  most 


The  Immobility  of  Labour  229 

difficult  to  be  transported."  The  free  movement  of  workers 
from  positions  wliere  they  are  ill  paid  to  positions  where  they 
are  better  paid,  which  is  essential  to  free  competition,  is  con- 
fined within  narrow  territorial  limits.  Ties  of  love,  family  asso- 
ciations, habit,  or  sheer  inertia  hold  most  men  to  the  localities 
in  which  they  were  born  despite  the  allurements  of  higher  earn- 
ings in  other  places.  There  is,  to  be  sure,  a  type  of  man  tc 
whom  the  attractiveness  of  new  experiences  in  new  surround- 
ings is  even  greater  than  that  of  home,  and  in  countries  in 
which  this  type  is  com^mon  competition  between  workers  is 
active  over  a  wide  area,  with  less  wdde  differences  in  the 
rates  of  wages  paid  to  workers  of  the  same  efficiency  in 
different  regions  as  its  result.  But  even  in  the  United  States, 
where,  according  to  the  census  returns,  some  twenty-five 
per  cent,  of  the  people  live  in  other  States  than  those  in 
which  they  were  born,  this  type  is  rare,  especially  among 
workmen  of  the  lower  grades,  and  dift"erences  in  wages  be- 
tween different  sections  persist  for  many  years.  These  dif- 
ferences would  doubtless  disappear  in  a  few  generations  if  new 
regions  were  not  constantly  being  opened  up  and  if  new 
methods  of  production  calling  for  a  different  distribution  of  the 
working  population  were  not  constantly  being  introduced. 
But  so  long  as  these  changes  occur  on  any  considerable  scale 
differences  in  wages  may  be  expected  to  continue.  Improve- 
ments in  means  of  transporting  workers  and  their  belongings 
and  of  transmitting  intelligence  tend  to  widen  the  labour 
market  and  may  in  time  make  it  as  wide  as  the  whole  country. 
There  seems  little  likelihood,  however,  that  the  barriers  that 
now  oppose  the  free  movement  of  population  between  different 
countries,  and  by  so  doing  perpetuate  differences  in  rates  of 
wages  between  nations,  will  be  overcome  for  many  centuries. 
Economists  describe  the  unwillingness  of  workmen  to  seek  the 
market  which  promises  the  highest  wages  as  the  immobility  of 
labour.  This  immobility  must  always  be  kept  in  mind  as  a 
chief  circumstance  preventing  that  distribution  of  the  labour 
force  of  each  country,  and  even  more  of  the  whole  world,  which 
would  yield  the  largest  productive  results.  From  the  point  of 
view  of  distribution  it  causes  some  labour  markets  to  be  over- 
supplied  relatively  with  the  different  grades  of  workers  for 


230 


Distribution:  Wages 


Efficiency 
and  Time 
Wages 
Contrasted 


Other 
Causes  of 
Differences 
in  Wages 


which  there  is  a  demand  and  forces  such  workers  to  content 
themselves  with  proportionately  lower  wages. 

§  135.  In  judging  of  the  extent  of  differences  in  the  rates 
of  wages  paid  in  different  localities  care  must  be  taken  to  com- 
pare workers  of  equal  degrees  of  efficiency.  From  the  point  of 
view  of  the  entrepreneur  it  is  not  the  time  or  effort  of  the 
worker  for  which  wages  are  paid,  but  the  work  done.  He  is 
interested  not  in  the  wages  per  hour,  or  per  day,  or  per  week 
of  his  employees,  but  in  the  cost  per  unit  of  what  they  accom- 
plish. If  of  two  workmen  labouring  side  by  side  one  accom- 
plishes in  a  given  time  twice  as  much  as  the  other,  his  wages 
should  be  twice  as  high  to  make  the  cost  of  his  labour  to  his 
employer  the  same  as  the  cost  to  him  of  the  labour  of  the  other 
workmen.  Free  competition  in  the  labour  market  tends  tcv 
equalise  the  cost  of  labour  or  efficiency-wages,  but  not  time- 
zvages,  except  for  workmen  who  are  equally  efficient.  The 
industrial  world  presents  many  examples  of  differences  in 
wages  paid  for  the  same  kind  of  work  due  to  differences  in 
the  efficiency  of  the  workmen.  Thus  farmhands  in  the  North- 
ern States  receive  two  or  three  times  as  high  wages  as  farm- 
hands in  the  cotton  fields  of  the  South,  partly  because  they 
work  harder  and  get  more  done  in  the  same  period  of  time. 
In  the  same  way,  the  differences  between  the  wages  paid  to 
American  mechanics  and  those  paid  to  similar  mechanics  on 
the  continent  of  Europe  is  due  in  part  to  the  greater  efficiency 
of  American  workmen.  In  comparing  Western  countries  with 
Eastern  countries  the  importance  of  efficiency  in  determining 
wages  must  not  be  lost  sight  of.  The  very  low  earnings  of  the 
Indian  coolie  are  due  in  part  to  a  very  low  standard  of  effi- 
ciency in  comparison  with  that  of  the  workers  of  the  white 
race.  Even  if  the  congestion  of  population  in  India  could  be 
relieved  the  low  industrial  efficiency  of  the  people  would  re- 
main a  cause  of  relatively  low  wages. 

§  136.  The  statement  that  competition  tends  to  make  the 
earnings  of  workers  of  equal  efficiency  the  same  in  any  one 
labour  market  is  only  roughly  accurate.  Men  do  not  consider 
the  money  return  which  an  occupation  promises  merely,  but  all 
of  the  advantages  and  disadvantages  connected  with  it.  The 
principal  other  comiderations  which  offset  and  consequently 


Allowance  for  Dangers  Incurred        231 

liclp  to  perpetuate  differences  in  money  wages  are  the  fol- 
lowing : 

( 1 )  It  is  not  money  wages,  but  real  wages,  that  are  com-  Differences 
pared,  and  the  latter  vary  with  the  expensiveness  of  living  in  |JJ  Livhie^^ 
different  localities.    In  country  districts  the  goods  which  wage- 
earners  of  the  lower  grades  consume  are  cheaper  than  they  are 

in  cities.  Rents  are  lower,  food  costs  less,  and  clothing  though 
dearer  really  costs  less  because  loss  is  required.  Hence  low 
money  wages  in  the  country  may  stand  for  the  same  real  wages 
as  high  money  wages  in  the  city.  An  equally  favourable  com- 
parison may  be  made  between  the  cost  of  living  in  a  warm  and 
in  a  cold  climate.  In  the  former  houses  need  less  to  be  heated, 
fewer  clothes  and  less  food  suffice,  and  the  number  of  free 
goods  is  larger.  These  are  other  circumstances  tending  to  keep 
money  wages  lower  throughout  the  Southern  States  in  the 
United  States  than  they  are  in  the  North. 

(2)  Some   occupations    require   longer   apprenticeship   and  Differences 
more  expensive  training  than  others.     In  comparing  different  Mastering 
occupations  men  normally  take  account  of  the  time  and  capital  Different 
that  must  be  invested  in  preparatory  training,  and  unless  the 
earnings  in  the  industry  requiring  special  preparation  promise 

to  be  large  enough  to  repay  them  for  the  investment,  they  will 
not  make  it.  In  practice  capital  invested  in  training  affords  a 
very  high  return  because  so  many  of  those  who  might  benefit 
most  from  training  are  too  poor  to  obtain  it. 

(3)  Occupations  differ  in  the  ease  or  difficulty  of  the  work  Differences 
required.  The  harder  and  more  disagreeable  the  work  the  ablenessof 
higher  must  the  wages  be  to  attract  men  from  easier  tasks.  Different 

C^  C  C  tl  D  3.- 

This  does  not  mean  that  those  who  do  the  most  disagreeable  tions 
work  are  always  the  ones  who  are  most  highly  paid.  It  often 
happens  that  men  who  do  such  work  have  not  the  option  of 
doing  something  easier,  and  when  this  is  the  case  their  earn- 
ings may  be  very  low.  Whenever  they  have  such  an  option, 
however,  the  wages  paid  for  the  most  arduous  toil  must  fully 
make  up  for  the  difference  or  it  will  fail  to  attract  its  quota  of 
workers. 

(4)  Some  positions  are  more  dangerous  than  others  and  Allowance 
must  offer  a  premium  to  cover  life  and  accident  insurance,  in  Dangers 
addition  to  mere  wages,  to  attract  workmen  from  safer  trades.  Incurred 


Allowance 
for 

Chances 
of  Success 


Social 

Esteem 
a  Factor 


Also 

Regularity 
of  Em- 
ployment 


Finally 
Chances  of 
Promotion 
Considered 


Competi- 
tion Would 
Make 

Advantages 
of  Different 
Employ- 
ments 
Equal  if 
Men  were 
Exactly 
Alike,  but 
They  are 
Not 


232  Distribution :  Wages 

(5)  The  chance  of  success  and  the  rewards  of  success  are 
different  in  different  occupations.  In  the  professions,  espe- 
cially, "  nothing  succeeds  like  success."  The  more  clients  or 
patients  a  man  has  the  more  eagerly  he  is  sought  by  additional 
clients  and  patients.  It  results  from  this  that  successful  pro- 
fessional men  are  as  a  rule  successful  even  beyond  their  deserts. 
The  hope  of  similarly  large  incomes  attract  into  professional 
callings  more  men  than  the  businesses  require.  This  reduces 
the  average  earnings  in  these  occupations.  In  the  United  States 
professional  men  undoubtedly  receive  smaller  average  incomes 
than  do  men  of  equal  ability  and  training  engaged  in  commer- 
cial enterprises,  and  partly  for  the  reason  just  given. 

(6)  Some  positions  are  held  in  high  esteem  and  offer  social 
advantages  to  compensate  for  lower  earnings.  This  is  true 
usually  of  professional  work  and  serves,  like  the  previous  in- 
fluence, to  depress  the  money  earnings  of  professional  men. 

(7)  The  regularity  of  employment  must  always  be  con- 
sidered. Trades  like  those  connected  with  building,  which 
give  employment  only  part  of  the  year,  must,  to  equalise  ad- 
vantages, offer  higher  day  wages  than  those  which  occupy  men 
continuously. 

(8)  The  chance  of  advancement  and  promotion  must  also 
be  taken  into  account.  Employments  which  lead  to  nothing 
should  afford  better  pay  than  those  having  educational  value 
and  serving  as  steps  in  a  gradual  ascent  to  higher  positions. 

These  and  other  similar  considerations  will  readily  be  ac- 
cepted as  reasons  for  differences  in  wages  that  are  independ- 
ent of  dift'erences  in  men.  Taken  together  they  come  so  near 
to  explaining  all  differences  in  wages  that  some  writers  have 
assumed  that  but  for  them  competition  would  in  time  bring 
the  money  wages  of  all  grades  of  workmen  to  one  uniform 
rate.  This  would  certainly  be  true  if  competition  were  per- 
fectly free  and  equal,  that  is,  if  all  men  were  sufficiently  alike 
to  turn  readily  to  the  occupations  that  offered  the  largest  re- 
turns. Under  such  circumstances  the  working  population 
would  move  away  from  industries  which  paid  low  wages  and 
towards  industries  which  paid  high  wages,  until  the  increased 
labour  supply  in  the  former  reduced  earnings  and  the  dimin- 
ished supply  in  the  latter  advanced  them  to  the  uniform  rate. 


Influence  of  Habit,  Custom,  and  Hducation    233 

But,  as  we  have  seen,  men  are  not  alike  in  their  industrial  qual- 
ities. We  must  now  inquire  why  the  progress  of  evolution 
does  not  make  them  alike  by  gradually  eliminating  all  but  those 
of  the  highest  industrial  type. 

§  137.  The  qualities  that  fit  men  for  the  performance  of  dif-  The 
ferent  industrial  tasks  are  partly  inherited  and  partly  acquired  I^^^i^ce 
by  education.     In  regard  to  the  laws  of  heredity  we  still  know  Inde- 
very  little.     Although  children  generally  display  some  of  the  '^^^n^'o^te 
characteristics  of  their  parents  or  grandparents,  they  do  so  in 
such  an  irregular  and  seemingly  haphazard  way  that  it  is  al- 
ways doubtful  what  traits  any  particular  child  is  going  to  de- 
velop.    Remarkable  men  and  women  have  frequently,  if  not 
usually,    rather    commonplace    children,    while    it    is    often 
impossible  to  say  from  which  parents  they  themselves  received 
their  remarkable  qualities.    Until  the  laws  of  heredity  are  more 
perfectly  understood  it  must  remain  doubtful  whether  heredi- 
tary   differences    tend   to    disappear.      Extreme    eccentricities 
which  prevent  the  individuals  displaying  them  from  maintain- 
ing themselves  and  rearing  families  of  average  size  are  of 
course  eliminated  by  the  process  of  evolution ;  but  within  the 
limits  permitted  by  the   necessity  of  survival   differences   in 
capacity  seem  to  be  transmitted  generation  after  generation 
without  appreciable  check. 

If  heredity  were  the  only  factor  in  determining  character  and  The 
capacity  the  adjustment  of  the  supply  of  workers  of  different  of  ^abit^ 
grades  to  the  demand  for  them  would  be  largely  outside  of  Custom, 
society's    control.     But    most   students    agree   that   education,  Education 
which  includes  all  of  the  formative  influences  acting  upon  hu- 
man beings  from  without  as  they  pass  through  life,  is  an  equally 
important  force.     Adam  Smith  went  so  far  as  to  say  that  "  the 
difference  between  the  most  dissimilar  characters,  between  a 
philosopher  and  a  common  street-porter,  for  example,  seems  to 
arise  not  so  much  from  nature  as  from  habit,  custom,  and  edu- 
cation."    A  similar  view  was  expressed  recently  by  a  Chicago 
judge  who  had  had  much  experience  in  dealing  with  youthful 
criminals.     When  asked  if  he  thought  that  his  own  children 
would  have  been   criminals  if  they  had  been  brought  up  in 
criminal  surroundings  he  replied :  "  I  don't  think  so,  I  know 
it."     Except  as  regards  abnormalities  both  in  the  direction  of 


234 


Distribution :  Wages 


Differences 
in 

Standards 
of  Living 
Perpetuate 
Differences 
in  Wages 


Ediication- 
al  Oppor- 
tunities 
Enjoyed 
bv 

Children 
in  First 
Grade 


genius  and  imbecility  the  view  that  "  habit,  custom,  and  educa- 
tion "  have  at  least  as  much  to  do  v^ith  differences  in  men  as 
"  nature  "  seems  to  be  justified  by  observation.  In  any  case  it 
is  chiefly  through  education  that  men  act  in  their  eft'orts  to  fit 
their  children  for  industrial  life. 

§  138.  Education  being  such  an  important  influence  in 
moulding  industrial  capacity,  a  partial  explanation  of  differ- 
ences in  capacity  must  be  sought  in  dift'erences  in  the  educa- 
tional opportunities  that  are  offered  to  the  children  of  different 
families.  Notwithstanding  the  self-sacrificing  devotion  of 
nearly  all  parents  to  the  interests  of  their  children,  and  not- 
withstanding improvements  in  free  public  educational  in- 
stitutions, such  differences  are  still  great,  even  in  the  United 
States.  Their  perpetuation  is  due  in  large  measure  to 
the  different  standards  of  living  which  control  the  conduct 
of  different  industrial  classes.  By  the  standard  of  living 
is  meant  the  mode  of  activity  and  scale  of  comfort  which 
a  person  has  come  to  regard  as  indispensable  to  his 
happiness  and  to  secure  and  retain  which  he  is  willing  to 
make  any  reasonable  sacrifice,  such  as  working  longer,  or  post- 
poning marriage.  It  is  evident  that  different  individuals  and 
different  classes  have  very  different  standards  of  living  and  also 
that  the  self-restraint  that  the  standard  imposes  upon  some 
is  greater  than  that  it  imposes  upon  others.  Standards  of 
living  are  nearly  if  not  quite  as  numerous  in  a  country  like  the 
United  States  as  degrees  of  industrial  capacity.  To  simplify 
the  discussion  we  may  divide  the  working  population  of  the 
United  States  into  the  same  five  grades  distinguished  in  a  pre- 
vious section  and  consider  how  the  different  standards  of  liv- 
ing of  these  different  grades  of  workers  affect  the  educational 
opportunities  which  children  born  into  them  enjoy. 

To  the  first  economic  class  belong  people  with  incomes  from 
property  or  from  professional  or  business  activity  exceeding 
$3000  a  year  for  each  family.  They  are  of  two  distinct  types : 
those  who  have  the  saving  instinct  highly  developed  and  those 
who  combine  with  a  fair  degree  of  prudence  good  professional 
or  business  ability.  In  this  class  are  included  the  great  army 
of  successful  entrepreneurs  and  the  holders  of  all  of  the  more 
important  salaried  positions.     Its  members  have  as  a  whole 


Children  of  the  Upper  Class  235 

very  definite  and  persistent  standards  of  living  and  although 
some  of  them  through  speculation,  dissipation,  or  other  cause, 
lapse  into  a  lower  class,  the  vast  majority  not  only  retain  their 
positions,  but  provide  for  their  children  educational  advan- 
tages and  business  openings  which  insure  the  latter's  reten- 
tion of  the  same  or  higher  standards  through  life.  The 
superior  educational  opportunities  which  children  of  this 
highest  class  enjoy  in  comparison  with  those  belonging  to  lower 
classes  begin  at  birth  and  continue  to  help  them  even  after  they 
are  independently  established.  They  have  the  constant  care  of 
loving  and  intelligent  m^others  and  the  best  medical  attendance 
through  the  trying  illnesses  of  infancy.  They  are  less  apt  to 
be  forced  in  their  development  and  more  certain  to  be  supplied 
regularly  with  nourishing  food,  pure  air,  and  the  other  requi- 
sites to  healthful  growth.  During  the  school  period  the  supe- 
rior opportunities  of  these  fortunate  children  multiply  rather 
than  diminish.  A  large  proportion  of  them  do  not  go  to  the 
public  schools,  but  receive  instruction  in  less  crow-ded  private 
schools  or  from  governesses  or  tutors  at  home.  Moreover,  their 
education  is  not  interrupted,  as  is  so  often  the  case  with  children 
belonging  to  the  lower  classes,  at  the  age  of  fourteen  or  fifteen. 
Being  under  no  pressure  to  support  themselves  or  to  contribute 
to  the  family  income,  they  may  go  through  the  high  school  or 
prepare  for  college,  take  a  college  course,  and  subsequently 
some  professional  or  technical  course,  if  they  have  a  bent  in 
either  of  these  directions.  As  a  result  of  these  superior  educa- 
tional advantages  children  of  this  class  are  early  fitted  for 
the  higher  grades  of  work.  Family  influence  insures  them 
favourable  openings  as  soon  as  they  are  ready  for  them,  and  the 
same  influence  often  facilitates  their  advancement.  Through  all 
the  years  of  preparation  children  of  this  most  favoured  class 
associate  together  and  see  little  of  children  from  other  ranks 
of  life.  Unconsciously  they  come  to  accept  the  standard  of 
living  of  their  set  as  the  only  possible  one.  From  every  side 
they  are  impressed  with  the  importance  of  a  good  income  as  a 
condition  to  happiness  and  with  the  advantages  of  property. 
Though  some  of  them  may  show  a  tendency  to  recklessness 
when  released  from  the  restraints  of  school  life,  most  of  them 
have  learned  prudence  without  ever  having  tasted  the  fruits  of 


236  Distribution :  Wages 

improvidence.  They  know  that  a  certain  income  is  indispen- 
sable to  what  they  consider  decent  single  existence  and  that  a 
somewhat  larger  income  must  be  assured  before  marriage  is  to 
be  thought  of.  Young  men  mindful  of  the  expenditures  of 
their  girl  friends  are  restrained  by  a  sense  of  chivalry  from 
proposing  marriage  until  they  can  provide  advantages  at  least 
equal  to  those  enjoyed  at  home.  On  their  side  young  women 
in  the  group  have  definite  ideas  in  regard  to  the  cost  of  main- 
taining a  household  and  are  quite  as  prudent  in  their  attitude 
towards  matrimony.  In  consequence  rash  matches  among 
young  people  of  this  class  are  few,  and  young  men  are  usually 
well  established  before  they  incur  the  responsibility  of  provid- 
ing for  a  family.  This  postponement  of  marriage  results  in  a 
low  birth-rate  for  the  class  as  a  whole,  which,  by  lessening  the 
number  trained  for  the  higher  professional  and  industrial  posi- 
tions, helps  to  maintain  the  earnings  which  holders  of  such 
positions  are  able  to  command. 
Children  The  second  economic  group  consists  of  the  great  army  em- 

Middle  braced  in  America's  "  middle  class."     Although  possessed  of 

Class  some  property  the  members  of  this  group  rely  chiefly  upon 

their  own  exertions  for  their  incomes,  which  range  from  $1500 
to  $3000  a  year  for  each  family.  The  different  types  found  in 
this  class  include  independent  business  men  operating  on  a 
small  scale,  salaried  managers,  overseers,  school-teachers, 
bookkeepers,  clerks,  etc.,  and  skilled  wage-earners  command- 
ing the  year  through  upwards  of  five  dollars  a  day.  Like  the 
members  of  the  higher  class  they  have  definite  standards  of 
giving,  but  these  standards  are  lower.  They  know  from  ex- 
perience that  happiness  is  attainable  on  the  smaller  incomes 
that  they  are  able  to  command,  and  their  ambitions  are  usually 
limited  to  seeing  their  children  equally  well  established  in  life. 
Unaccustomed  to  funded  incomes  they  are  little  apt  to  acquire 
any  considerable  amount  of  property.  The  educational  oppor- 
tunities afiforded  children  of  this  class  are  inferior  in  many  re- 
spects to  those  of  children  of  the  wealthy.  Although  as  well 
cared  for  during  the  period  of  infancy,  they  are  sent  too  early 
to  the  public  schools.  Here  the  underpaid  and  overworked 
teachers  do  what  they  can  for  their  large  classes,  but  the  very 
conditions  of  the  system  prevent  that  individual  attention  to 


Standards  of  Living  Not  Rigid         237 

the  special  needs  and  aptitudes  of  pupils  that  is  so  important  to 
the  development  of  capacity.  Education  of  this  sort  means 
shaping-  all  to  one  common  mould,  and  if  it  docs  not  always  re- 
sult in  mediocrity  it  is  because  its  tendencies  are  counteracted 
by  home  and  other  influences.  In  the  common  schools,  more- 
over, children  of  the  second  group  come  in  contact  less  with 
children  of  well-to-do  parents  than  with  those  whose  surround- 
ings are  even  humbler  than  their  own.  Instead  of  becoming 
acquainted  with  higher  standards  of  living  they  are  confirmed 
in  their  impression  that  their  own  are  the  best. 

Either  from  necessity,  or  because  they  undervalue  the  train-  Their 
ing  ofifered  by  high  schools  and  colleges,  parents  in  this  second  Occupa- 
class  usually  withdraw  their  children  from  school  at  the  age  of  tions 
sixteen  or  seventeen.  Boys  are  now  ready  to  begin  earning 
something  and  the  choice  of  an  occupation  has  to  be  made.  At 
this  critical  period  the  lack  of  broad  acquaintance  with  business 
opportunities  and  of  business  influence  on  the  part  of  parents 
tells  heavily  against  their  sons.  With  their  limited  horizons 
parents  of  this  class  are  too  apt  to  choose  openings  where  earn- 
ings begin  at  once  rather  than  those  calling  for  a  prolonged 
period  of  apprenticeship.  As  a  rule  they  shrink  from  risks,  pre- 
ferring modest  security  to  the  uncertain  prospect  of  large 
achievements.  This  attitude  leads  them  to  select  for  their  sons 
salaried  positions,  necessarily  near  the  bottom,  calling  for  the 
performance  of  routine  tasks  which  have  little  educational 
value,  and  from  which  they  have  little  chance  of  rising  to  the 
higher  positions  of  trust  and  responsibility  to  which  the  larger 
salaries  are  attached.  Thus  at  the  age  when  children  of  the 
higher  class  are  leaving  colleges  and  technical  and  professional 
schools,  or  have  made  considerable  progress  towards  master- 
ing the  details  of  complex  businesses,  those  of  the  middle  class 
have  already  lost  the  precious  years  when  they  might  have 
been  fitted  for  something  superior  to  the  positions  in  which 
their  fathers  are  growing  old.  Like  their  fathers  they  marry 
early  and  rear  families  to  the  standards  of  living  that  they  have 
made  their  own. 

In  a  progressive  country  like  the  United  States  many  excep-  Standards 
tions  must  be  made  to  the  above  description.  Standards  of  NorRigui 
living  are  flexible  and  boys  of  exceptional  ability  frequently 


238  Distribution :  Wages 

rise  from  very  humble  beginnings  to  the  highest  posts  in  the 
business  world.  These  exceptional  careers  are  more  interest- 
ing and  naturally  attract  more  attention  than  those  which  are 
more  usual  and  typical,  but  they  should  not  be  allowed  to  ob- 
scure the  fact  that  children  in  the  two  classes  described  enjoy 
unequal  advantages  and  that  the  great  majority  must  be  satis- 
fied to  hold  their  own  in  the  class  to  which  they  were  born. 
For  one  man  who  breaks  with  the  standards  of  his  class  and 
rises  to  a  higher  standard  there  are  a  hundred  who  follow  in 
their  parents'  footsteps.  This  does  not  mean  necessarily  that 
the  standard  of  living  of  each  class  is  fixed  and  rigid.  The 
whole  group  may  be  moving  up  or  falling  back  together.  It 
means  simply  that  differences  in  standards  of  living  and  the 
conduct  that  results  from  them  are  largely  responsible  for  the 
perpetuation,  generation  after  generation,  of  the  striking  dif- 
ferences in  wages  that  have  been  described. 
Children  The  third  class  embraces  skilled  workers,  both  hard  and  soft 

Third  handed,  who  depend  largely  on  their  wages,  low  salaries,  or 

Grade  the  produce  of  their  farms  for  their  maintenance  and  whose 

yearly  incomes  range  from  $600  to  $1500  to  the  family.  Its 
members  are  as  a  rule  sober  and  industrious.  They  are  inter- 
ested in  their  work  and  it  is  sufficiently  individual  to  permit 
them  to  take  pride  in  its  accomplishment.  At  the  same  time 
the  range  of  their  ambitions  is  narrow  and  their  standards  of 
living  make  them  satisfied  with  the  incomes  they  receive.  In 
comparison  with  members  of  the  next  higher  class  they  tend  to 
marry  somewhat  earlier,  to  have  somewhat  larger  families  in 
proportion  to  their  means,  to  withdraw  their  children  from 
school  somewhat  sooner,  and  to  be  somewhat  less  mindful  of 
the  latter's  ultimate  advantage  in  choosing  occupations  for 
them.  The  way  in  which  these  tendencies  react  upon  the  indi- 
vidual capacities  of  members  of  this  group  and  prevent  any 
considerable  number  of  them  from  becoming  competitors  for 
the  positions  open  to  the  higher  classes  has  been  sufficiently 
suggested  in  what  was  said  of  Group  2. 
The  To  the  fourth  economic  group  belongs  the  numerically  large 

Grade  ^^^^^  ^^  unskilled  workmen.     Their  earnings  vary  somewhat  at 

different  seasons,  but  may  be  put  at  from  one  to  two  dollars  a 
day  for  the  North  Atlantic  States.     The  tasks  which  unskilled 


The  Fourth  Grade  239 

workmen  perform  depend  mainly  upon  physical  strength  and 
endurance  and  are  easily  mastered.     Their  hours  are  long  and 
their  labour  exhausting,  and  in  consequence  their  lives  afford 
little  opportunity  for  attention  to  other  than  the  merely  physi- 
cal wants.     Early  marriages  are  facilitated  by  the  fact  that  the 
full  earning  power  of  men  of  this  class  is  attained  at  nineteen 
or  twenty,  and  that  their  standard  of  living  opposes  no  barrier 
so  long  as  work  is  steady  and  wages  are  certain.     Children 
come  in  this  class  before  the  parents  have  themselves  reached 
maturity,  and  their  number,  and  the  rude  way  in  which  the 
family  is  compelled  to  live,  prevent  the  mother  from  giving 
them  the  attention  that  their  best  interests  demand.     As  these 
children  approach  the  age  when  they  can  go  to  school  they  are 
allowed  to  spend  more  and  more  time  on  the  streets  and  to  ac- 
quire that  precocious  knowledge  so  destructive  of  the  idealism 
natural  to  childhood.    In  school  their  progress  is  retarded  by  the 
lack  of  that  stimulus  and  encouragement  on  the  side  of  parents 
that  is  so  helpful  to  children  reared  in  more  fortunate  circum- 
stances, and  just  as  they  are  getting  old  enough  to  form  judg- 
ments for  themselves  their  help  is  needed  at  home,  or  jobs  are 
secured  for  them,  and  the  formal  part  of  their  education  is 
brought  to  an  abrupt  close.     Made  bread-winners  thus  early  in 
life,  they  are  apt  before  they  are  twenty  to  find  the  restraints 
of  home  irksome,  and  to  resolve  to  create  homes  for  themselves 
as  soon  as  their  earnings  come  up  to  the  low  standard  to  which 
they  are  accustomed.     Acting  on  such  resolutions  they  follow 
in  the  footsteps  of  their  parents,  as  their  children  are  likely  to 
follow  in  their  footsteps.     Thus  for  unskilled  workmen,  as  for 
the  three  higher  classes  considered,  the  standard  of  living  and 
the  conduct  which  it  imposes  effectually  bar  any  but  the  excep- 
tionally gifted  or  exceptionally  fortunate  from  training  them- 
selves  to  do   work  of  higher  grade.     Their  competition   for 
employment  is  limited  to  that  grade  of  work  to  which  they 
were  born,  and  though  some  in  each  generation  break  the  bonds 
that  hold  them  down  and  pass  from  their  group  to  the  one  just 
above  it.  the  number  is  too  small  to  close  entirely  the  gulf  that 
divides   the   earnings   of   representative  members   of  the   two 
grades. 

The  fifth  and  last  class  into  which  industrial  society  has  been 


The 

Fifth 

Grade 


Non- 
competing 
Groups 


240  Distribution  :  Wages 

divided  includes  those  unfortunates  whose  average  earnings  to 
the  family  are  less  than  one  dollar  a  day.  This  is  the  class 
sometimes  spoken  of  as  the  "  submerged  tenth."  Its  members 
are  without  definite  standards  of  living,  never  having  acquired 
any  or  having  been  compelled  to  give  them  up.  They  are  pre- 
vented by  some  moral,  mental,  or  physical  disability  from  get- 
ting on  in  the  world,  and  unless  that  disability  can  be  removed 
and  they  can  be  won  back  to  one  of  the  four  classes  that  have 
been  described,  they  must  inevitably  sink  to  the  level  of  social 
dependents.  Every  community  has  some  representatives  of 
this  class  and  recognises  its  uplifting  as  a  social  duty.  As  the 
result  of  the  efforts  that  are  being  put  forth  and  of  the  high 
death-rate  to  which  the  class  is  subject,  its  members  are  con- 
stantly changing.  Little  can  be  said  of  it  pertinent  to  this  dis- 
cussion except  that  those  who  descend  to  it  from  above  are 
more  numerous  than  those  who  rise  out  of  it.  Dependency 
and  death  are  the  goals  to  which  most  of  its  members  are  drift- 
ing, and  the  only  hope  of  betterment  lies  in  the  gradual  elimi- 
nation of  those  circumstances  which  cause  this  class  to  be  re- 
cruited year  after  year  from  the  higher  classes. 

§  139.  The  conclusion  of  this  review  of  the  habits  and  stand- 
ards of  different  groups  of  workers  is  that  the  industrial 
population  is  divided  up  into  a  number  of  classes  among 
whose  members  competition  is  so  fitful  and  irregular  that  we 
may  without  serious  error  follow  Professor  Cairnes,  the  Eng- 
lish economist,  in  styling  them  "  non-competing  groups," 
Partly  because  the  hereditary  qualities  required  are  rare,  but 
even  more  because  few  besides  those  born  into  the  highest  eco- 
nomic class  who  have  these  qualities  can  obtain  the  educational 
advantages  necessary  for  their  development,  the  number  of  in- 
dividuals competent  to  fill  the  higher  executive,  professional, 
and  artistic  positions  is  exceedingly  limited  in  comparison  with 
the  demand  for  them.  Tlie  earnings  of  men  in  these  positions 
remain  therefore  many  times  higher  than  those  received  in  in- 
ferior posts.  Similar  limitations  on  the  power  to  compete  per- 
petuate the  higher  earnings  of  each  successive  grade  of 
workers  in  comparison  with  those  in  the  next  lower  class,  and 
together  they  make  the  phenomenon  of  one  man  receiving 
$100,000  a  year  for  his  services  and  another  receiving  no  more 


Need  of  l-rcc  Puljlic  Schools  241 

than  $100  so  common,  even  in  a  country  where  there  are  no 
restrictions  on  labour  and  where  the  common  schools  are  free 
to  all,  that  it  scarcely  excites  comment  or  seems  to  require 
explanation. 

But,  it  may  be  asked,  if  education  is  so  important  a  cause  of  Reasons 

for 

the  differences  in  the  earning  powers  of  different  men,  and  if  Failure  to 
acquiring  education  is  simply  one  way  of  investing  capital  for  a  ^^^^^'■ 
future  return,  how  does  it  come  about  that  more  capital  is  not  Capital  in 
invested  in  this  way  ?     The  answer  is  simple.     Those  to  Vv'hom  Education 
the  education  would  be  invaluable  are  too  young  or  too  igno- 
rant to  appreciate  the  fact  or  are  without  the  capital  to  invest. 
Their  parents  are  also  without  capital  and  have,  moreover,  a 
less  direct  personal  interest  in  the  result.     Men  with  capital,  on 
the  other  hand,   do  not  invest  it  in  the  education  of  other 
people's  children,  except  as  a  charity,  because  there  is  no  form 
of    contract    under    which    they    could    claim    a    part    of    the 
return. 

Those  needing  education  cannot,  as  minors,  legally  contract, 
nor  can  their  parents  bind  them,  except  within  certain  limits, 
during  the  period  of  their  minority.  It  follows  that  for  all  but 
the  children  of  the  wealthy  such  education  as  is  enjoyed  must 
be  public  and  free.  For  the  community  as  a  whole,  the  invest- 
ment of  capital  in  educational  opportunities  tending  to  add  to 
the  industrial  capacity  of  boys  and  girls  is  a  certain  means  of 
adding  to  the  collective  wealth.  Capital  so  used,  especially  to 
inculcate  higher  standards  of  living  and  efficiency  among  chil- 
dren of  the  poor,  yields  a  princely  return  and  will  continue  to 
do  so  until  the  present  inequalities  disappear.  It  is  therefore 
to  the  community,  and  to  improvements  in  the  free  schools, 
free  colleges,  and  free  universities  that  we  must  look  for 
the  removal  of  the  disadvantages  under  which  children  of  the 
lower  classes  now  labour.  To  remove  them  completely  it  will 
be  necessary  not  only  to  improve  schools,  colleges,  and  univer- 
sities covering  all  branches  of  technical  and  professional  train- 
ing, but  to  raise  the  standards  of  parents  so  that  they  shall  be 
eager  to  have  their  children  enjoy  the  best  advantages  and  to 
provide  in  some  way  for  the  maintenance  of  children  whose 
parents  cannot  afford  to  support  them  during  their  years  of 
study  and  preparation.     The  mere  mention  of  these  needs  re- 


242 


Distribution  :  Wages 


"onclusion 


The  Deter- 
mination of 
Marginal 
Wages 


enforces  what  has  been  said  of  the  present  lack  of  equal  edu- 
cational opportunities. 

Summing  up  the  results  of  this  long  analysis,  we  must  con- 
clude that  the  industrial  population  consists  of  non-competing 
groups  of  workers  whose  differences  in  fortune  and  in  stand- 
ards of  living  are  reflected  in  unequal  educational  opportuni- 
ties which  serve  to  perpetuate,  generation  after  generation,  the 
differences  in  wages  explained  in  previous  sections.  The 
picture  drawn  appears  somewhat  exaggerated  for  the  United 
States  at  the  present  time,  because  the  country  is  comparatively 
new  and  undeveloped.  The  exploitation  of  natural  resources 
still  offers  a  wide  field  for  the  adventurous  and  prevents,  while 
it  continues,  that  rigid  stratification  into  economic  classes  that 
is  found  in  the  older  countries  of  the  world.  But  such  a  strati- 
fication already  appears  in  the  United  States  and  it  will  show 
itself  more  and  more  clearly  as  the  natural  resources  of  the 
country  come  more  completely  under  private  ownership,  unless 
the  tendency  in  this  direction  is  successfully  opposed  by  a  broad 
and  vigorous  social  policy.  In  spite  of  it  there  are  even  in  the 
older  countries  referred  to  many  individual  exceptions  to  the 
rule  that  children  remain  in  the  economic  class  to  which  they 
were  born.  Persons  of  great  native  ability  rise  to  positions 
suited  to  their  capacities  despite  all  obstacles.  On  the  other 
hand,  all  advantages  seem  wasted  on  other  persons  who  from 
innate  stupidity  or  perverseness  are  incapable  of  deriving  bene- 
fit from  them.  These  exceptions  are  of  much  more  signi- 
ficance to  the  moralist  than  the  more  commonplace  careers  that 
have  alone  received  attention  in  the  preceding  analysis.  They 
justify  the  familiar  assertion  that  each  one's  success  in  life 
depends  mainly  upon  himself,  but  they  do  not  alter  the  more 
fundamental  truth  that  the  sort  of  self  one  is  depends  upon 
heredity  and  education  and  that  differences  in  educational 
opportunities  are  a  chief  cause  of  the  differences  in  wages 
which  it  is  the  task  of  economics  to  explain. 

§  140.  The  causes  of  differences  in  rates  of  wages  and  of 
their  persistence,  generation  after  generation,  have  been  ex- 
plained in  the  preceding  sections  and  it  remains  now  to  ac- 
count for  the  earnings  that  are  enjoyed  by  marginal  workmen, 
which  are  the  minimum  from  which  all  higher  earnings  are 


Marginal  Wages  243 

measured.  The  thesis  that  we  have  proposed  to  defend  is  that 
under  conditions  of  free,  all-sided  competition  the  earnings  of 
marginal,  as  of  other,  workmen  will  correspond  accurately  to 
the  contributions  which  they  make  to  production.  To  gauge 
this  contribution  we  must  pass  now  to  the  discussion  of  inter- 
est, the  last  share  in  distribution.  The  different  factors  in  pro- 
duction co-operate  in  all  productive  processes.  The  product  is 
a  joint-product  and  we  can  determine  the  share  of  it  that  is 
economically  ascribable  to  each  factor  only  after  we  have 
clearly  perceived  the  basis  on  which  the  claim  of  each  factor 
rests.  In  the  next  chapter  we  have  to  explain  interest  and  dif- 
erences  in  rates  of  interest  by  an  analysis  similar  to  that  we 
have  applied  to  profits,  rent,  and  wages,  and  then  to  consider 
how  the  comparisons  are  made  by  which  the  proportionate 
share  of  each  factor  is  determined. 

REFERENCES  FOR   COLLATERAL   READING 

*Marshall,  Principlesof  Economics, Book  VI. .Chaps.  III.-V. ;  *Clark, 
Distribution  of  Wealth,  Cliaps.  VII.  and  VIII.  and  XI.-XIV.;  *Tatis. 
si'i^.  Wages  and  Capital,  Part  I.;  Walker,  The  Wages  Question  ; 
Schoenhof,  The  Economy  of  High  Wages,  Part  I. ;  * Piersoii,  Princi- 
ples of  Economics,  Part  I.,  Cliap.  VI.;  Davidson,  The  Bargain 
Theory  of  Wages;  Thompson,  The  Theory  of  Wages  and  Its  Ap- 
plication ;  *  Adam  Smith,  Wealth  of  Nations;  Book  I.,  Chap.  VIII. 
and  Chap.  X.  Part  \.;* Fetter ,  Principlesof  Economics,  Chap.  23; 
*Carver,  The  Distribution  of  Wealth,  Chap.  IV. 


CHAPTER  XIV 


DISTRIBUTION:   INTEREST 


Interest 
Defined 


Interest, 
Pent,  and 
Wages 


Differences 
in  Rates 
of  Interest 


The 

Mobility 
of  Capital 
Depends 
upon  the 
Replace- 
ment Fund 


§  141.  Interest  has  already  been  defined  as  what  is  paid  for 
the  use  of  capital.  From  the  point  of  view  of  distribution  it 
is  the  share  of  income  that  is  assigned  to  capital  goods,  or  more 
properly  to  the  owners  of  such  goods,  for  the  part  the  latter 
play  in  production. 

In  one  of  its  aspects  interest  resembles  rent.  Like  the  lat- 
ter it  is  a  share  of  income  assigned  to  material  aids  to  pro- 
duction. Unlike  rent,  however,  it  is  not  paid  for  the  use  of  un- 
producible  gifts  of  nature,  but  for  products  of  human  industry. 
As  explained  in  Chapter  \'II.  the  creation  of  capital  goods  in- 
volves, in  addition  to  the  factors  that  co-operate  in  all  pro- 
duction, saving,  abstinence,  and  waiting.  Capitalists  contribute 
to  production  in  these  ways  just  as  truly  as  do  workmen 
through  their  efiforts.  In  this  aspect  interest  more  closely 
resembles  wages.  Both  reward  men  for  services  they  render 
in  connection  with  production. 

In  the  explanation  of  interest  it  will  be  convenient  to  begin 
by  showing  why  different  rates  of  interest  are  paid  for  the  use 
of  the  same  amounts  of  capital,  just  as  we  began  the  explana- 
tion of  wages  by  discussing  causes  of  differences  in  wages.  The 
causes  determining  marginal  interest  and  the  relation  in  which 
it  stands  to  wages  will  then  be  considered. 

§  142.  Before  attempting  to  explain  the  causes  of  dif- 
ferences in  rates  of  interest  it  will  be  well  to  make  clear  the 
forces  which  tend  to  equalise  the  earnings  of  all  kinds  of  capi- 
tal goods  in  competitive  industries.  The  almost  infinite  variety 
of  capital  goods  and  the  diversity  of  the  services  they  render  in 
production  were  considered  in  Section  74,  Chapter  VII.  Some 
capital  goods  are  fairly  mobile  and  may  be  assigned  readily  to 
the  particular  branch  of  production  in  which  they  are  in  great- 
est   demand.     Most    of  them,    however,    are    more     or    less 

244 


The  Mobility  of  Capital  245 

specialised  and  seem  to  lack  the  plasticity  necessary  to  free 
movement  and  free  competition.  This  is  the  situation  as  it 
presents  itself  to  the  observer  taking  an  instantaneous  photo- 
graph of  capitalistic  production.  But  instantaneous  photo- 
graphs of  shifting,  changing  objects  are  seldom  very  lifelike, 
because  they  fail  to  represent  the  movement  which  is  their 
essential  characteristic.  To  be  understood,  capitalistic  pro- 
duction must  be  studied  not  as  it  appears  at  any  particular 
moment,  but  as  it  appears  over  a  considerable  period  of  time. 
It  is  not  an  instantaneous  photograph,  but  a  "  moving  picture," 
or  a  series  of  successive  impressions  that  is  required.  Every 
capital  good  has  its  distinct  life  history.  By  itself  it  has  little 
mobility,  but,  through  the  fact  that  it  comes  into  being,  wears 
out  and  is  replaced,  it  allows  great  mobility  to  the  capital  tran- 
siently embodied  in  it.  No  capital  good  is  ever  called  into 
being  unless  the  investor  or  entrepreneur  responsible  for  its 
creation  believes  that  it  will  earn  not  only  the  current  rate  of 
interest  on  the  sum  invested  in  it  until  it  is  worn  out,  but  in 
addition  a  fund  for  its  own  replacement.  In  the  bookkeeping 
of  the  industrial  world  a  part  of  the  earnings  of  capital  goods 
is  regularly  set  aside  to  replace  those  goods.  Circulating  capi- 
tal destroyed  in  a  single  use  must  completely  replace  itself  as 
well  as  earn  interest  in  that  use.  Fixed  capital  which  may  be 
used  for  some  time  has  a  longer  period  in  which  to  replace  it- 
self, but  in  connection  with  it  too  the  process  of  replacement  is 
in  constant  operation.  The  constantly  accruing  replacement 
fund  which  flows  back  to  investors  and  entrepreneurs  is  com- 
pletely mobile.  It  appears  as  a  certain  am.^unt  of  free  purchas- 
ing power  which  may  be  used  either  to  replace  the  capital  goods 
in  process  of  destruction  with  exactly  similar  goods,  or  to  call 
into  being  quite  dififerent  capital  goods,  as  the  judgment  of  the 
entrepreneur  may  determine.  At  any  given  moment  the 
amount  of  this  mobile  replacement  fund  is  small.  In  order 
that  delay  and  loss  may  be  avoided,  its  destination  must  be  de- 
cided upon  even  before  it  arises,  and  in  consequence  it  sel- 
dom accumulates  in  the  hands  of  investors  and  entrepreneurs, 
but  merely  flows  through  their  hands  on  its  way  to  embodiment 
in  new  forms  of  capital  goods.  Nevertheless  the  existence  of 
this  constant  flow  of  mobile  purchasing  power  serves,  over  con- 


246 


Distribution  :  Interest 


Differences 
in  Rates 
of  Interest 
Eliminated 
by  Com- 
petition 


Differences 
in  the 
Same 
Branch  of 
Production 


siderable  periods  of  time,  to  give  great  mobility  to  capital  as  a 
whole.  Through  its  agency  the  limited  fund  of  capital  may  be 
embodied  at  each  period  in  just  those  forms  of  capital  goods 
which  industrial  society  most  requires.  If  inventions  are  bemg 
made,  the  approved  appliances  may  gradually  be  substituted 
for  those  which  are  old-fashioned  and  out  of  date.  If  popula- 
tion is  increasing  rapidly,  for  costly  machines  requiring  few 
workmen  may  be  substituted  more  numerous  and  cheaper 
machines  requiring  more  workmen,  and  if  the  substitution  is 
made  slowly  the  loss  resulting  may  be  inappreciable.  On  the 
other  hand,  if  the  population  is  stationary  and  the  capital  fund 
is  itself  growing,  the  place  of  the  hand  implements,  which 
were  previously  the  forms  of  capital  goods  most  needed,  may 
gradually  be  taken  by  machines  which  can  be  operated  by  fewer 
workmen.  Through  these  and  similar  changes,  the  constantly 
accruing  replacement  fund  helps  to  adapt  a  community's  capi- 
tal to  a  community's  need  for  capital  goods. 

§  143.  If  industrial  changes  should  be  suddenly  suspended 
and  opportunity  given  for  industrial  forces  to  come  to  an 
equilibrium,  difterent  rates  of  interest  would  be  found  to  pre- 
vail in  different  branches  of  production  and  even  in  the  same 
branches  for  different  firms.  Some  of  these  differences  would 
be  apparent  merely,  being  due  to  the  larger  allowance  needed 
for  the  replacement  of  capital  goods  where  they  are  liable  to 
accidental  destruction.  Others  would  be  genuine,  and  it  will 
be  instructive  to  observe  how  they  would  disappear  as  society 
approached  the  state  of  normal  equilibrium. 

Consider  first  differences  among  different  firms  in  the  same 
branch  of  production.  One  firm  has  preceded  all  others  in 
putting  in  some  superior  machine  or  other  form  of  capital,  and 
this  gives  it  higher  earnings  until  others  gradually  introduce 
the  superior  machines  into  their  plants  also.*  But  competi- 
tors are  always  trying  to  keep  their  plants  up  to  the  highest 
point  of  efficiency.  If  invention  and  improvement  in  processes 
were  suspended  it  would  take  but  a  short  time  for  the  very  best 

*  These  higher  earnings  are  called  "  profits  "  in  Chapter  X.  in  con- 
formity to  business  usage.  In  describing  them  here  as '"  interest"  we 
simply  go  a  step  further  back  and  attach  them  to  the  superior  capital 
goods  to  which  they  owe  their  existence. 


Different  Branches  of  Production        247 

equipment  to  be  introduced  into  all  freely  competing  establish- 
ments. Those  unable  to  modernise  their  processes  would  be 
forced  into  other  industries  as  society  approached  the  state  of 
equilibrium.  They  could  not  sell  at  the  normal  price  and  con- 
tinue to  make  the  wages  of  management  they  might  secure  in 
other  industries.  Allowing  time  enough  for  the  process,  there- 
fore, it  is  evident  that  in  the  absence  of  patents,  or  other 
monopoly  conditions,  the  earning  power  of  capital  goods  in 
different  competing  establishments  would  be  equalised. 

But  between  different  branches  of  production  differences  Differences 
might  still  persist.  Shoe  machinery  might,  for  example,  be  ^i-anchesof 
earning  more  than  textile  machinery.  But  if  this  were  the  case,  Production 
one  or  both  must  be  earning  less  or  more  than  the  current 
rate  of  interest  for  capital  generally.  If  shoe  machinery  were 
earning  more  than  the  current  rate,  competing  shoe  manu- 
facturers would  tend  to  enlarge  their  plants  to  secure  the  extra 
interest  on  a  larger  investment.  By  so  doing  they  would,  on 
the  one  hand,  make  drafts  on  the  country's  free  capital  tending 
to  enhance  the  rates  of  interest  other  entrepreneurs  would  have 
to  pay  to  secure  the  capital  needed  to  keep  their  plants  intact, 
while,  on  the  other,  they  would  tend  to  depress  the  price  of 
shoes  by  increasing  the  supply  and  in  this  way  to  lessen  the 
total  to  be  divided  among  all  the  shares  in  distribution  in  this 
branch  of  production.  As  the  result  of  action  and  reaction  the 
extra  earnings  of  shoe  machinery  would  disappear.  If,  on  the 
other  hand,  the  difference  was  due  to  the  fact  that  textile 
machinery  was  earning  less  than  the  current  rate  in  industries 
generally,  the  conditions  would  be  favorable  to  a  reduction  in 
the  number  of  textile  plants  and  the  gradual  release  of  capital 
for  other  investments.  This  would  tend  to  raise  the  price  of 
textiles  and  give  larger  returns  to  textile  machinery,  while  it 
at  the  same  time  reduced  the  relative  earnings  of  capital  goods 
in  other  industries  by  permitting  a  slight  expansion.  As 
society  approached  the  state  of  normal  equilibrium,  dift'erences 
in  interest  rates  would  be  less  common  and  less  extreme  in 
consequence  of  such  changes  and  adjustments,  and  before  the 
normal  state  w&s  reached  they  would  have  entirely  disappeared. 
Only  on  this  condition  could  a  permanent  equilibrium  be  estab- 
lished, since  anv  dift'erence  in  interest  rates  is  itself  a  reason  for 


248  Distribution  :  Interest 

change.  When  the  state  of  equihbrium  was  reached,  capital 
goods  would  be  so  distributed  that  each  branch  of  oroduction 
would  have  just  its  quota  of  capital  embodied  in  the  best  forms 
of  capital  goods  known  to  entrepreneurs,  and  no  more.  The 
earnings  of  each  unit  of  capital  in  each  capital  good  would  be 
kept  the  same  so  long  as  the  equilibrium  continued  as  those 
of  every  other,  and  the  division  of  the  free-flowing  replace- 
ment fund  among  different  branches  of  production  would  be 
simply  the  automatic  restoration  of  the  wastes  of  production, 
accomplished  as  perfectly  as  is  the  restoration  of  the  wastes  of 
the  human  body  through  the  processes  of  life. 
Causes  of  §  1 44.  The  above  analysis  of  the  process  by  which  differ- 

in  Rates  ences  in  rates  of  interest  would  be  eliminated,  if  industrial 
changes  were  completely  suspended,  helps  to  explain  why  in 
actual  industrial  society  differences  are  found.  To  the  extent 
that  the  mobile  replacement  fund  that  has  been  described  fails 
to  multiply  forms  of  capital  the  moment  they  are  needed,  or  to 
withdraw  other  forms  the  moment  they  are  superfluous,  there 
is  opportunity  for  differences  in  the  earning  power  of  capital 
goods.  The  circumstances  which  cause  such  differences  to 
arise  will  now  be  briefly  indicated. 
Monopoly  The  most  familiar  ground  for  differences  in  the  return  from 

different  investments  is  the  presence  of  monopoly.  The 
monopolist  deliberately  restricts  the  output  of  the  monopolised 
product  so  that  the  returns  to  the  capital  and  labour  he  em- 
ploys exceed  those  to  be  realised  in  competitive  industries.  We 
have  designated  the  surplus  return  as  monopoly  profit,  but 
since  it  frequently  comes  to  investors  in  the  form  of  dividends 
it  is  often  thought  of  as  a  part  of  interest.  In  a  sense  monopoly 
profit  is  a  part  of  the  share  of  income  ascribed  to  the  capital 
goods  which  figure  in  monopolistic  production.  This  is  par- 
ticularly true  when  the  basis  of  the  monopoly  is  a  patent. 
Patented  machines  do  earn  the  larger  returns  which  they  en- 
able their  owners  to  secure.  At  the  same  time  the  reason  for 
the  larger  earnings  is  always  the  monopoly,  and  it  conduces  to 
clearness  to  consider  dividends  from  investment  in  monopo- 
listic enterprises  as  made  up  in  part  of  interest  and  in  part  of 
monopoly  profit. 

The  close  resemblance  of  interest  on  permanent  improve- 


Interest  on  Permanent  Improvements     249 

ments  to  rent  has  already  been  commented  upon.     Such  im-  interest  on 
provements  will  not  be  made  unless  there  is  good  reason  to  Jp^p^J^e^"'' 
think  they  will  afford  at  least  the  current  rate  of  interest,  but  ments 
after  they  have  been  made  the  capital  invested  becomes  a  part 
of  the  land  itself  and  receives  income  in  obedience  to  the  lav;^ 
of  rent.     If  tlie  anticipations  of  the  investor  are  exactly  real- 
ised, such  capital  goods  afford  an  income  corresponding  to  the 
current  rate  of  interest,  but  only  so  long  as  industrial  condi- 
tions remain  undisturbed.     Prospectively  regarded  such  an  in- 
come is  interest,  retrospectively  it  is  rent. 

Everv  specialised  form  of  capital  is  subject  to  a  certain  ex-  Specialised 
....  ^  .  .        ^  Forms  of 

tent  to  the  same  hmitations  as  permanent  improvements.    Con-  Capital 

sider,  for  example,  a  factory  which  it  takes  a  year  to  build  and  hf \<^.,l^'t'^^® 

.  .  ,  •  ,  "•,,,,•  1         1  1         Mobihtv 

which  cannot,  without  considerable  loss  in  value,  be  turned  to  over  Short 

account  in  another  branch  of  industry  than  that  for  which  it  Periods 
was  designed.  The  investment  of  capital  in  such  a  factory  will 
only  be  made  in  case  there  is  good  reason  to  expect  that  it  will 
earn  at  least  the  current  rate  of  interest.  But  before  the  factory 
can  be  available  for  production  a  year  must  elapse.  In  this 
time  changes  may  occur.  The  prudent  investor  will  hesitate 
to  transform  his  free  capital  into  a  factory  until  there  is  a  mar- 
gin of  prospective  return  over  and  above  the  current  rate  of 
interest  to  compensate  him  for  the  risk  he  incurs.  It  follows 
that  until  the  earnings  of  specialised  capital  goods  exceed,  to 
some  extent,  the  current  rate  of  return  on  free  capital  such 
goods  will  not  be  multiplied.  Competition  among  investors 
stops  before  the  earnings  of  such  goods  are  reduced  to  the  gen- 
eral level.  On  the  other  hand,  after  the  factory  has  been 
erected,  the  capital  invested  in  it  can  neither  be  withdrawn  nor 
allowed  to  remain  idle  without  considerable  loss  to  the  in- 
vestor. If  industrial  conditions  change  so  that  the  share  of  in- 
come assigned  to  the  factory  diminishes,  the  investor  must 
make  the  best  of  the  situation.  Instead  of  getting  the  interest 
he  expected,  or  even  the  current  rate  on  free  capital,  he  may 
obtain  only  one-half  the  current  rate  or  even  less,  and  yet  it 
may  pay  him  better  to  keep  the  factory  in  operation  than  to 
close  it  or  try  to  turn  it  to  some  other  use.  Under  such 
circumstances  the  earnings  of  specialised  capital  goods  may 
depart   widely   and   for  considerable   periods    from   the  cur- 


250 


Distribution:  Interest 


And  are 
Conse- 
quently 
Liable  to 
Depreciate 


Differences 
in  Risk 
of  Loss 


rent  rate  of  interest.  Factories  and  other  capital  goods 
whose  creation  requires  a  good  deal  of  time  may  earn  more 
than  the  current  rate  of  interest  for  months  and  even 
for  years.  Specialised  capital  goods,  which  wear  out  very 
gradually  and  require  each  year  but  a  small  allowance  for 
replacement,  may,  on  the  other  hand,  in  the  face  of  ad- 
verse conditions  earn  less  than  the  current  rate  for  equally 
long  periods.  In  communities  in  which  changes  in  the  de- 
mands of  the  market  and  in  the  methods  of  production  are 
constantly  occurring,  variations  from  the  normal  rate  of 
interest  will  be  so  comm.on  as  to  obscure  the  fact  that  competi- 
tion tends  to  establish  one  uniform  rate  of  interest  for  all  capi- 
tal goods.  When  competition  is  free,  however,  this  tendency 
is  always  active,  and  even  in  a  country  as  progressive  as  the 
United  States  it  confines  variations  in  most  investments  within 
narrow  limits. 

As  already  pointed  out,  the  business  community  anticipates 
the  equalising  influence  of  competition  by  revaluing  specialised 
and  fixed  forms  of  capital  goods,  so  that  their  prices  always 
stand  in  about  the  same  relation  to  their  earnings.  The  actual 
capital  invested  in  an  enterprise  ceases  to  measure  the  value  of 
the  capital  goods  used  in  connection  with  it  as  soon  as  the  earn- 
ing power  of  these  capital  goods  is  established.  Free  capital 
goods  must  continue  to  command  the  current  rate  of  interest  or 
be  diverted  to  other  uses.  Their  value  is  accordingly  fairly 
stable.  Specialised  capital  goods  cannot  be  diverted  easily  and 
hence  must  depreciate  heavily  if  the  enterprise  proves  less  suc- 
cessful than  was  anticipated.  Such  depreciation  finds  its  ulti- 
mate limit  in  the  value  of  such  goods  for  other  industrial  uses. 
In  the  case  of  highly  specialised  goods  this  value  may  be  only 
that  of  the  materials  of  which  they  are  made. 

§  145.  Another  cause  of  differences  in  interest  rates  also  con- 
nected with  differences  in  the  risks  involved  in  different  in- 
vestments, results  from  the  danger  of  accidental  destruction  to 
which  some  capital  goods  are  exposed.  Whenever  this  danger 
may  be  provided  against  by  the  machinery  of  insurance,  the 
difference  figures  simply  in  the  larger  replacement  fund  which 
must  be  earned  in  addition  to  current  interest  by  the  capital 
goods  affected.     In  many  cases  the  danger  is  too  irregular  and 


Difterenccs  in  Social  Esteem  251 

uncertain   to   be   insured   against,   and    the   increased    interest 

needed  to  attract  capital  into  the  precarious  investment  depends 

upon  the  temperament  of  investors.     Conservative  people  will 

be  deterred  by  the  fear  of  loss  from  investing  at  all  in  such 

enterprises.     More  reckless  and  optimistic  capitalists  may  be 

induced  to  take  great  chances  by  the  promise  of  only  a  slightly 

larger  return  than  the  current  rate  of  interest. 

Besides  differences  in  risk,  differences  in  the  social  esteem  Differences 
.   .      ,.„  .  111  1-/V  '"  Social 

m  which  different  investments  are  held  may  cause  differences  Esteem 

in  rates  of  interest.  For  example,  in  most  countries  the  busi- 
ness of  the  pawnbroker  is  in  ill  repute  and  in  consequence 
competition  in  that  business  is  confined  to  a  limited  number  of 
persons.  The  men  who  have  the  shrewdness  and  callousness 
to  public  opinion  which  such  enterprises  require  are  able  to 
make  the  capital  they  control  earn  large  returns.  These 
should  be  attributed  in  part  to  the  high  wages  of  managemxent 
which  such  disagreeable  occupations  command,  but  are  also  in 
part  due  to  the  capital  itself  If  more  capital  were  available 
for  such  businesses  the  incomes  of  pawnbrokers  would  be 
materially  reduced.  Unfortunately  capital  is  so  easily  de- 
tached from  the  person  of  the  owner  that  this  consideration 
has  less  effect  on  modes  of  investment  and  rates  of  interest 
than  might  be  expected.  A  striking  illustration  of  the  lack  of 
a  sense  of  responsibility  which  those  having  capital  to  invest 
often  evince  was  brought  to  light  recently  in  New  York  City 
when  it  was  discovered  that  a  prominent  church  was  deriving 
a  part  of  its  revenues  from  the  ownership  of  some  of  the  worst 
tenement  houses  in  the  city.  When  tliose  charged  with  funds 
intended  to  further  the  mission  of  Christ  can  penuit  them  to  be 
invested  in  insanitary  and  immoral  tenements,  not  much  re- 
gard for  public  welfare  is  to  be  expected  from  ordinary 
investors. 

In  addition  to  the  differences  in  rates  of  interest  earned  in  Differences 
different  investments  and  by  dift'erent  kinds  of  capital  goods,  j".^.^*^^^ 
there    are    differences    among    different    sections.     Although  Different 
much  more  readily  transported  to  the  best  market  than  labour, 
capital  also  is  timid  about  venturing  far  from  its  source  of 
origin.     Capitalists  usually  feel  that  they  can  better  estimate 
the  risks  involved  in  investments  near  home  than  at  a  distance. 


Sections 


252  Distribution :  Interest 

In  consequence  of  this  feeling  capital  tends  to  be  concentrated 
in  the  centres  where  men  of  wealth  live,  and  new  and  backward 
communities  are  able  to  command  less  than  their  proportionate 
share  of  the  available  capital  equipment.  Instead  of  there 
being  one  rate  of  interest  on  free  capital  in  a  country  like  the 
United  States  there  are  a  variety  of  rates,  ranging  from  the 
low  rates  found  in  the  large  cities  and  the  manufacturing  sec- 
tions of  the  North  and  East  to  the  high  rates  prevailing  in  the 
agricultural  and  mining  regions  of  the  South  and  West.  A 
variation  of  from  two  to  three  per  cent,  between  the  rates  of 
interest  regularly  charged  for  equally  good  loans  by  banks  in 
New  York  City  and  Arizona  roughly  reflects  the  difference 
in  the  earning  power  of  capital  goods  in  the  two  localities. 
As  different  sections  are  brought  into  more  intimate  business 
relations  the  supply  of  capital  tends  to  distribute  itself  more 
equally  over  the  entire  industrial  field  and  such  differences  be- 
come less  marked.  As  in  the  case  of  wages,  differences  in 
rates  of  interest  among  different  countries  are  likely  to  per- 
sist long  after  differences  among  different  sections  of  the  same 
country  have  become  insignificant. 
Interest  |  j^^    In  the  foregoing  discussion  interest  has  been  spoken 

of  as  the  earnings  of  capital  goods.  An  equally  familiar  aspect 
of  it  is  in  connection  with  the  borrowing  and  lending  of  money 
or  purchasing  power.  Interest  for  the  use  of  purchasing  power 
presents  no  exception  to  the  general  statement  that  it  is  the 
share  of  income  earned  by  capital  goods,  since  pieces  of  money 
are  themselves  such  goods,  but  the  reasons  for  the  payment 
of  interest  for  the  use  of  money  require  special  explanation. 
The  whole  problem  is  complicated  by  the  fact  that  under 
certain  limitations  credit,  or  mere  promises  to  pay  money 
made  by  individuals  or  banks  in  which  the  public  has  con- 
fidence, may  serve  the  same  uses  as  money  and  like  it  com- 
mand interest.  To  avoid  the  discussion  of  these  complica- 
tions until  we  are  ready  to  consider  the  subjects  of  Money  and 
Credit,  it  will  be  assumed  in  this  section  that  forms  of  credit 
play  no  part  as  a  medium  of  exchange,  that  the  only  money 
used  is  that  composed  of  the  standard  monetary  metal  and  that 
the  coinage  policy  of  the  community  is  similar  to  that  of  the 
United  States  in  that  it  maintains  a  constant  parity  in  value  be- 


on  Money 


Money  or  Purchasing  Power  253 

tween  standard  coins  and  the  metal  they  contain.  Under  such 
circumstances  money  would  be  simply  one  of  the  goods  in 
general  use  that  was  singled  out  to  serve  as  the  medium  of 
exchange,  but  whose  value  was  determined  by  the  same  con- 
siderations that  affect  the  values  of  other  goods. 

The  efficiency  of  money  as  the  medium  of  exchange  depends  Reasons 
upon  the  readiness  with  which  it  passes  from  hand  to  hand,  payment 
and  hence  the  best  and  most  economical  money  is  that  which  of  Interest 
circulates  most  freely.     Such  money  contributes  to  production  orMoney^* 
as  truly  as  do  the  tools,  machines,  and  other  capital  goods 
which  were  made  prominent  in  the  preceding  sections.     With- 
out it  the  exchanges  of  goods  necessary  to  the  continuance  of 
the  division  of  labour  which  adds  so  much  to  production  would 
be  seriously  restricted.     As  the  tool  of  exchange,  money  is 
accepted  readily  for  other  capital  goods,  and  for  stocks,  bonds, 
and  mortgages  on  which  interest  is  paid.    As  long  as  this  is  the 
case  and  capital  goods,  or  stocks,  bonds,  and  mortgages  earn 
interest,  money  must  also  command  interest.     It  is  not  only 
itself  an  important  capital  good,  but  it  is  the  medium  by  means 
of  which  any  and  all  other  capital  goods  may  be  acquired. 
The  second  circumstance  causes  it  always  to  possess  a  deriva- 
tive earning  power  corresponding  to  the  current  interest  rate 
earned  by  capital  goods  generally. 

In  a  community  in  which  all  goods  are  bought  and  sold  for  Money  or 

money,  money  is  the  form  in  wdiich  first  appears  not  only  all  Power  the 

income,  but  also  the  replacement  fund  which  reimburses  the  Form  first 

capitalist  for  the  gradual  destruction  of  the  capital  goods  in  by  the  Re- 

w'hich  his  means  are  embodied.     The  way  in  which  it  is  spent  placement 

,     ,        ,.         .  ,         .  ,       Fund 

determmes  on  the  one  hand  the  direction  to  be  given  to  the 

machinery  of  production,  and  on  the  other  the  forms  of  capital 
goods  to  be  added  to  this  machinery  in  place  of  the  capital  goods 
that  are  destroyed  in  each  productive  period.  As  money  flows 
from  the  buyers  of  goods  to  sellers  the  destination  of  the 
greater  part  of  it  is  already  determined.  It  pays  bills  and  debts 
that  have  been  contracted  during  the  process  of  production,  se- 
cures necessary  materials,  or  effects  indispensable  repairs  of 
plant  and  equipment.  A  part  of  it  only  is  free  to  be  spent  or 
invested  as  the  judgment  of  the  entrepreneur  may  detemiine. 
This  part  constitutes  the  free  fund  of  purchasing  power  which 


254 


Distribution  :  Interest 


Interest 
on  Money 
Loans 
Made 
Uniform 
in  each 
Money 
Market 


Differences 
in  Risk 
Cause 
Differences 
in  Rates 
of  Interest 


serves,  as  explained  in  a  previous  section,  to  give  a  high  degree 
of  mobility  to  all  capital. 

The  rate  of  interest  that  will  be  paid  for  the  use  of  money, 
or  purchasing  power,  is  kept  uniform  within  each  money  mar- 
ket in  the  same  way  that  the  prices  of  identical  goods  are  kept 
at  a  parity  in  a  goods  market.  Individually  borrowers  of  money 
wish  to  pay  as  little  as  possible,  but  they  are  willing  to  pay  up 
to  a  certain  rate  rather  than  not  secure  a  loan.  Individual 
bankers  and  other  lenders  wish  to  get  as  high  rates  as  possible, 
but  will  accept  rates  down  to  a  certain  point  rather  than  have 
their  money  idle.  Bankers  and  other  lenders  propose  rates  just 
as  goods-dealers  fix  prices  for  goods.  Borrowers  indicate  by 
their  eagerness  in  accepting  the  rates  named  whether  they  are 
low  enough  to  effect  the  loan  of  the  purchasing  power  avail- 
able for  the  purpose.  As  the  result  of  bargaining  and  compe- 
tition the  rates  on  each  class  of  transactions  are  at  length 
adjusted,  and  each  lender  is  forced  to  accept  about  the  same 
rate  as  every  other. 

In  the  case  of  interest  on  money  loans  there  are  differences 
in  rates  corresponding  to  the  differences  in  the  earning  power 
of  capital  goods  and  due  to  the  same  general  causes.  Since 
money  commands  interest  because  it  stands  for  the  capital 
goods  for  which  the  borrower  proposes  to  exchange  it,  the 
risks  connected  with  investments  in  capital  goods  attach  also 
to  loans  of  money.  The  chief  dift'erence  is  that  the  borrower 
of  money  usually  pledges  himself  personally  to  repay  the  loan 
even  though  the  business  enterprise  for  the  formation  of  which 
he  secures  it  turns  out  badly.  If  he  is  a  man  of  means  or  of 
unquestioned  honesty  and  business  ability  this  personal 
guarantee  will  serve  to  offset  a  large  element  of  risk  in  the 
enterprise  to  be  furthered  by  the  loan.  If,  on  the  other  hand, 
all  his  wealth  is  embarked  in  the  single  venture  and  its  failure 
is  likely  to  cause  his  own  bankruptcy,  the  personal  guarantee 
will  be  of  little  value  and  the  lender  will  become  practically  a 
partner  in  the  enterprise.  Because  of  such  dift'erences  in  the 
risks  involved  in  different  transactions  and  other  circumstances 
discussed  in  Chapter  XVIII. ,  the  rates  of  interest  on  money 
loans  vary  within  wide  limits. 

§  147.  In  the  preceding  sections  the  causes  of  differences  in 


Marginal  W^ages  and  Marginal  Interest   255 

the  rates  of  interest  have  been  discussed  and  the  process  has  Differences 

been   traced  by   which   the   earninjrs  of  all  jroods  would   be  '')  |'^^tes 

•'  o  &  Qf  Interest 

levelled  to  one  uniform  rate  in  a  society  brought  to  a  state  of  Less 
normal  equilibrium.     Such  a  consummation  is  much  nearer  at  tiia^n^"'^ 
hand  in  actual  industrial  society  than  is  one  uniform  rate  of  Differences 
wages.     Capital  goods  are  impersonal.     As  they  wear  out  they  '"     ^^^^ 
create  a  free  replacement  fund  which  is  constantly  available  to 
equalise  their  earning  powers.     Moreover,  capital  passes  much 
more  readily  from  one  part  of  a  country  to  another  than  does 
labour.     If  industrial  changes  should  be  completely  suspended 
for  but  a  few  years,  substantial  equality  in  interest  rates  might 
be  expected  to  establish  itself  over  a  wide  region.     These  facts 
cause  economists  to   use   the   expression   "  general   rate "   in 
reference  to  interest,  as  they  would  not  be  warranted  in  using 
it  in  connection  with  wages.     By  it  is  meant  the  rate  which 
economic    forces    tend    to    make   general.     In    the    following 
discussion   we  will  use  that  expression,  or  the  more  precise 
phrase  "  marginal  rate,"  as  convenience  may  dictate.     The  pre- 
cise rate  of  interest  is,  of  course,  not  in  question  in  this  section, 
but  rather  the  causes  which  unite  to  make  the  rate  high  or  low 
and  to  determine  its  relation  to  other  shares  in  distribution. 

We  are  now  prepared  to  consider  the  relation  between  the  How 
different  shares  in  distribution  and  to  prove  our  thesis  that  the  Wa^T  and 
general  or  marginal  rate  of  interest  and  the  marginal  rate  of  I^Iarginal 
wages  or  the  rate  of  wages  of  marginal  workmen  tend,  under  are  De- 
conditions  of  free,  all-sided  competition,  to  equal  the  contribu-  termined 
tions  which  the  respective  factors  make  to  production.   To  sim- 
plify the  discussion  we  may  assume  that  free  competition  has 
eliminated  net  or  competitive  profits,  as  it  constantly  tends  to 
do,  so  that  the  reward  of  entrepreneurs  is  confined  to  their 
wages  of  management,  which  obey  the  same  principles  as  wages 
generally.     Monopoly  profits  are,  of  course,  excluded  from  the 
problem  since  their  very  existence  is  inconsistent  with  the  free 
competition  assumed.     Even  were  this  not  the  case  we  should 
be  justified  in  ignoring  them  in  connection  with  the  present 
problem,  since  the  wage  and  interest  rates  paid  for  workmen 
and  capital  goods  in  monopolistic  enterprises  are  usually  ad- 
justed to  the   rates  paid   in   competitive  businesses.     Entre- 
preneurs controlling  monopolies  wish,  as  much  as  other  entre- 


256 


Distribution :  Interest 


Marginal 
Rates  may- 
be Studieci 
at  the 
Margin  of 
Cultivation 


Entire 
Return  at 
the  Margin 
Constitutes 
Wages  and 
Interest 


The  Cir- 
cumstances 
Determin- 
ing the 
Amount  of 
the  Joint 
Share 


preneurs,  to  secure  their  productive  factors  as  cheaply  as  possi- 
ble. They  could  afford  often  to  pay  very  high  wages  and 
interest  at  the  expense  of  their  monopoly  profits,  but  as  a  mat- 
ter of  fact  they  usually  pay  only  a  little  if  at  all  higher  rates 
than  those  fixed  by  general,  that  is,  competitive,  conditions.  It 
follows  that  the  explanation  of  wages  and  interest  that  applies 
to  competitive  industries  will  apply  also,  so  far  as  these  shares 
are  concerned,  to  monopolistic  industries. 

The  explanation  of  rent  given  in  Chapter  XII.  leaves  its  rela- 
tion to  wages  and  interest  in  no  uncertainty.  It  is  a  differential 
return  due  to  the  superiority  of  the  land  or  other  natural  agent 
used  in  the  given  productive  enterprise  in  comparison  with 
marginal  land  devoted  to  the  same  purpose.  At  the  final  mar- 
gin of  production  it  does  not  appear  at  all ;  at  other  points  it 
takes  the  surplus  due  to  natural  conditions  and  in  no  wise 
affects  the  shares,  wages  and  interest.  Within  each  labour 
market  the  same  rates  of  wages,  approximately,  are  paid  for 
the  same  grades  of  labour,  whether  rent  happens  to  be  another 
item  of  expense  which  the  entrepreneur  incurs  or  not.  The 
same  statement  holds  true  of  each  market  for  loans  of  capital. 
It  follows  that  an  explanation  of  the  causes  fixing  wages  and 
interest  at  the  no-rent  margin  of  production  is  a  complete  ex- 
planation. The  same  forces  are  active  in  every  other  part  of 
the  industrial  field  and  serve  to  determine  wages  and  interest 
in  practical  independence  of  rent. 

With  profits  eliminated  and  rent  explained  in  entire  inde- 
pendence of  the  other  shares,  there  are  left  to  be  analysed  the 
causes  which  determine  the  division  of  income  between  wages 
and  interest.  At  the  final  margin  of  production  in  competitive 
enterprises  the  entire  product  is  divided  between  these  two 
shares,  and  before  we  attempt  to  explain  the  law  of  division  it 
will  be  well  to  recall  the  influences  which  determine  the  amount 
of  this  joint  return. 

§  148.  If  the  joint  share  which  goes  to  labour  and  capital  at 
the  margin  of  production  includes  the  entire  product  which 
free  land,  labour,  capital,  and  the  organising  ability  of  entre- 
preneurs produce  at  the  margin,  its  size  depends  obviously  upon 
all  of  the  factors  that  were  discussed  in  the  chapters  on  Pro- 
duction.    Of  primary  importance  is  the  quality  of  the  land  and 


Influence  of  Entrepreneurs  257 

the  natural  agents  wliich  are  used  at  the  margin.  In  a  country 
like  the  United  States,  which  is  abundantly  supplied  with  land 
and  natural  resources  in  proportion  to  its  population,  the  lands, 
mines,  forests,  fisheries,  sources  of  water  power,  etc.,  which  are 
used  at  the  margin  are  rich  and  afford  large  returns  to  the 
labour  and  capital  applied  to  them.  Up  to  a  quite  recent  period 
in  the  history  of  America,  improvements  in  transportation 
facilities  and  the  discovery  of  new  sources  of  natural  wealth 
have  kept  pace  with  the  growth  of  population  and  of  capital 
and  the  margin  of  production  has  been  lowered  but  little,  if  at 
all.  It  has  been  from  the  first  discovery  of  the  country  very 
much  higher  than  the  margin  of  production  found  in  Europe, 
and  this  has  been  a  chief  cause  of  the  high  earnings  which 
labour  and  capital  have  commanded  in  the  New  World. 
Wages  and  interest  have  been  higher  because  labour  and  capi- 
tal have  been  more  generously  assisted  by  nature  in  marginal 
industries  where  this  assistance  has  been  gratuitous. 

Next   to   the   location   of   the   margin   of    production,   the  The 
efficiency  wath  which  labour  and  capital  are  correlated  in  pro-  of  Entre- 
duction  is  the  most  important  influence  determining  the  amount  pieneurs 
of  their  joint  share.     This  depends  upon  the  intelligence  and 
enterprise  of  entrepreneurs.     The  United  States  is  fortunate  in 
this  regard  also.     Its  captains  of  industry  compare  favourably 
with  those  of  any  other  country  and  it  is  doubtful  if  industrial 
organisation  is  anywhere  more  highly  developed.     Through 
efficient  organisation  labour  and  capital  succeed  in  producing 
and  earning  more  than  they  could  if  less  intelligently  directed. 

Other  factors  influencing  the  result  are  the  industrial  capacity  Qualities 
of  the  labourers  as  individuals.     The  more  ability  and  energy  oJiantities 
they    put    into    their    work    the    larger    will    their    return   be.  of^ 
Equally   important  is   the  efficiency   of  the   forms   of  capital  andCapital 
utilised  in  production.     If  improved  tools  and  machinery,  con-  Goods 
venient  and  sanitary  buildings,  etc.,  are  the  forms  into  which       ^ 
the  community's  capital  is  thrown,  the  returns  will  be  larger 
than  if  poor  implements  and  badly  planned  structures  predomi- 
nate.    The  efficiency  of  the  forms  of  capital  used  depends  upon 
the  progress  that  has  been  made  in  invention  and  discovery. 
In  this  field,  also,  the  United  States  compares  favourably  with 
other  countries.     Its  capital  equipment  is  not  perhaps  quite  as 


258 


Distribution  :  Interest 


Both 

Wages  and 
Interest 
High  in  the 
United 
States 


Workmen 
and  Capital 
Goods 
Compete 
As  well  as 
Co-operate 


large  in  proportion  to  its  population  as  is  that  of  some  older 
countries,  but  it  is  up-to-date  and  efficient.  By  its  aid  the 
product  shared  between  labour  and  capital  in  marginal  indus- 
tries is  further  increased. 

Through  these  influences,  and  all  of  the  others  discussed  in 
the  chapters  on  production,  the  joint  share  of  income  which 
goes  to  labour  and  capital  is  determined.  If  the  conditions  are 
favourable,  as  they  unquestionably  are  in  the  United  States,  the 
joint  share  will  be  large.  The  terms  of  its  division  between 
labour  and  capital  themselves  determine  whether  wages  will 
be  high  relatively  and  interest  low,  or  interest  high  and  wages 
low,  or  both  wages  and  interest  high  together.  The  last  con- 
dition is  that  found  in  the  United  States  in  comparison  with 
conditions  in  European  countries. 

§  149.  We  are  now  ready  to  discuss  the  causes  which  deter- 
mine the  division  of  income  between  wages  and  interest.  As 
each  is  paid  for  the  part  which  the  respective  factors,  labour 
and  capital,  play  in  production,  we  should  expect  the  amounts 
paid  or  the  rates  of  wages  and  interest  to  be  in  proportion  to 
the  importance  of  the  services  which  each  renders,  and  this  is 
in  fact  the  case.  As  already  suggested,  workmen  and  capital 
goods  not  only  co-operate  in  production,  but  compete.  At  some 
points  in  every  industry  entrepreneurs  have  the  alternative  of 
using  certain  grades  of  labour  or  certain  forms  of  capital  for 
the  accomplishment  of  a  desired  result.  Lifting  may  be  done 
by  capital  goods  in  the  form  of  elevators,  cranes,  etc.,  requir- 
ing only  human  guidance,  or  by  workmen  laboriously  climbing 
ladders  with  loads  on  their  backs.  Moving  may  be  accom- 
plished by  men  trundling  wheelbarrows  or  pushing  tram  cars, 
by  means  of  horsecars,  or  by  steam  railroads.  Similarly  in 
manufacturing,  the  tool-equipped  workman  is  ever  a  com- 
petitor of  the  automatic  machine.  Even  in  agriculture  steam 
plows  may  be  used  in  place  of  horse  plows  with  a  considerable 
saving  in  labour,  and  harrowing,  planting,  reaping,  and  other 
processes  may  be  performed  through  the  use  of  machines  of 
varying  degrees  of  complexity,  or  by  hand  tools.  In  deciding 
between  capital  goods  and  workmen  at  these  competing  points, 
the  guiding  principle  always  acted  upon  by  entrepreneurs  is  to 
choose  that  combination  of  factors  which,  in  proportion  to  its- 


Labour  and  Capital  Competitors        259 

efficiency,  is  cheapest.  Workmen  are  substituted  for  capital  as 
long  as  it  pays  to  make  the  change.  At  other  points  capital 
goods  are  substituted  for  labour  up  to  the  same  limit.  Every 
such  substitution  tends  to  enhance  the  price  that  must  be  paid 
for  the  use  of  the  preferred  factor,  since  it  involves  increased 
demand  for  it  without  any  change  in  its  supply.  It  at  the  same 
time  tends,  to  lower  the  price  that  must  be  paid  for  the  factor 
that  is  rejected.  Its  supply  is  increased  without  any  corre- 
sponding increase  in  demand.  In  actual  society,  where  changes 
are  constantly  occurring  not  only  in  the  quantities  of  labour 
and  capital,  but  in  the  methods  of  production  and  the  kinds  of 
capital  used,  these  substitutions  occur  constantly  and  the  dis- 
tribution of  labour  and  capital  is  far  from  being  at  any  one  time 
what  it  is  tending  to  become.  If  changes  were  to  be  suspended, 
substitutions  of  workmen  for  capital  and  of  capital  goods  for 
labour  would  continue  for  a  time,  but  each  substitution  would 
help  to  bring  society  nearer  to  the  state  of  normal  equilibrium. 
When  that  state  was  reached  capital  goods  would  continue  to 
be  used  for  many  purposes  for  which  they  alone  are  suited,  and 
workmen  would  continue  to  be  employed  at  many  tasks  which 
could  not  possibly  be  done  by  the  most  perfect  machinery  or 
other  capital  goods.  At  other  points  capital  goods  would  be 
doing  tasks  that  might  be  done  by  labour,  while  workmen 
would  be  doing  things  that  might  be  effected  through  capital. 
For  some  of  these  tasks  one  or  the  other  would  be  distinctly 
preferable  so  long  as  wage  and  interest  rates  remained  as  they 
were,  and  therefore  they  would  be  little  involved  in  the  substi- 
tutions made  after  changes  were  suspended.  In  the  case  of 
others  the  choice  between  the  factors  at  current  rates  of  wages  This 

and  interest  would  be  a  very  nice  one.     Entrepreneurs  would  Competf- 

■'  ,       ,         ^  tion  Leads 

continue  for  some  time  to  make  substitutions  at  these  points,  toCompari- 

and  these  substitutions  would  serve  for  some  time  to  cause  c"'^^."?^^ 

bubstitu- 

changes  in  wage  and  interest  rates  which  would  make  further  tions  by 
substitutions  desirable.    The  range  of  these  changes  would  con-  ^yi^'^J  ^^^ 
tract  steadily  as  the  state  ofnormal  equilibrium  was  approached,  Interest 
and  when  that  state  was  reached  capital  goods  would  be  so  determined 
assigned  that  their  net  addition  to  the  product  just  covered  the 
rate  of  interest  that  had  to  be  paid  for  them,  and  workers  would 
be  so  assigned  that  they  received  just  what  they  produced  also. 


26o 


Distribution :  Interest 


The  Law 
of  Distribu- 
tion for  a 
Society  in 
the  State 
of  Normal 
Equilib- 
rium 


The 

Same  Law 

Applies 

Roughly  to 

Actual 

Industrial 

Society 


Only  on  this  condition  could  there  be  a  state  of  equilibrium,  be- 
cause paying  to  owners  of  capital  less  than  capital  goods  pro- 
duced, or  to  workers  less  than  they  produced,  would  involve  a 
fourth  element  in  distribution,  an  extra  profit  to  the  entre- 
preneur. Competition  eliminates  this  extra  profit  only  by 
bidding  up  wages  and  interest  until  each  corresponds  accu- 
rately to  the  addition  that  workmen  and  capital  goods  con- 
tribute to  the  product.  The  measurement  of  these  additions 
economically  ascribable  to  workers  and  capital  goods  is 
effected  very  simply  by  means  of  substitutions.  Capital  goods 
are  substituted  for  labour  and  workmen  are  substituted  for 
capital  down  to  a  margin  of  indifference,  w^here  both  factors 
are  equally  cheap  at  prevailing  rates  of  wages  and  interest. 
At  these  points  wages  paid  for  labour  secure  the  same  product 
as  the  same  sum  spent  on  interest  for  capital.  The  product- 
iveness of  the  two  factors  is  compared  and  each  receives  the 
exact  equivalent  of  what  it  contributes  to  production.  The 
law  which  determines  the  division  of  the  product  between 
labour  and  capital  in  competitive  industries  for  a  society  in  a 
state  of  normal  equilibrium  is,  therefore,  that  each  receives  the 
share  that  it  produces.  As  all  capital  goods  will  have  the  same 
earning  power,  the  earnings  of  the  goods  at  the  margin  of  in- 
difference will  fix  the  general  rate  of  interest.  All  grades  of 
workmen  will  not  be  compensated  equally,  but  as  their  earnings 
are  arranged  in  a  scale,  in  the  manner  explained  in  the  last 
chapter,  the  determination  of  the  earnings  of  marginal  work- 
men will  serve  indirectly  to  determine  the  wages  of  all. 

Although  rarely  exactly  established,  and  never  maintained 
for  any  great  length  of  time  in  actual  industrial  society,  the 
margin  of  indifference  between  labour  and  capital  that  has 
been  described  is  of  the  greatest  practical  consequence.  The 
efforts  of  entrepreneurs  are  constantly  directed  towards  using 
capital  goods  only  down  to  the  margin  of  indifference  on  the 
capital  side,  and  towards  employing  workmen  only  down  to 
this  margin  on  the  labour  side.  To  overstep  it  in  respect  to 
either  is  to  incur  loss,  while  on  the  other  hand  failure  to  push 
the  use  of  the  productive  factors  to  this  limit  in  each  branch  of 
production  is  to  fall  short  of  the  competitive  ideal  which  dis- 
tributes labour  and  capital  over  the  industrial  field  in  exact  pro- 


Law  of  Distribution  Illustrated  261 

portion  to  the  need  there  is  for  them.  In  actual  industrial 
society  the  use  of  additional  capital  goods  here,  and  the  em- 
ployment of  more  workmen  of  a  given  grade  there,  or  the  with- 
drawal of  capital  goods  or  the  discharge  of  workmen,  have  for 
their  object  better  conformity  to  the  ideal  arrangement  of 
labour  and  capital  that  has  been  described.  At  any  given  time 
a  rough  approximation  to  the  ideal  towards  which  competitive 
forces  are  always  straining  is  actually  presented,  and  compari- 
sons between  the  productiveness  of  quantities  of  capital  and 
quantities  of  labour  are  being  made  by  entrepreneurs  in  every 
branch  of  production  and  are  determining  their  business  deci- 
sions. Thus  we  conclude  that  the  rate  of  interest  earned  by 
capital  goods  and  the  rate  of  wages  earned  by  marginal  work- 
men tend  to  correspond  to  the  contributions  which  the  respect- 
ive factors  make  to  the  product  of  industry  at  the  margin  of 
indifference  where  their  contributions  are  measured,  and  that 
these  marginal  rates  are  standards  to  which  all  other  rates  are 
adjusted. 

§  150.  It  should  be  carefully  noted  that  the  productiveness  The  Law 
of  either  labour  or  capital,  as  measured  by  economic  forces,  ^^j^^f" 
depends  not  only  upon  the  location  of  the  margin  of  produc-  Illustrated 
tion  and  its  own  efficiency  and  supply,  but  also  upon  the  effi- 
ciency and  supply  of  the  other  factor.  This  may  be  made 
clear  by  means  of  an  example.  Let  the  reader  imagine  an 
island  community  which  has  an  abundance  of  land  of  the 
best  quality  and  therefore  no  occasion  to  pay  rent,  and 
from  which  monopoly  is  absent,  so  that  the  products  of 
industry  are  divided  by  competition  between  wages  and 
interest.  Suppose  that  at  the  outset  there  are  looo  workers 
and  $1,000,000  worth  of  capital  embodied  in  those  capital 
goods  for  which  the  community  has  most  need.  Assume  fur- 
ther that  the  net  product  of  a  3-ear's  industry  is  worth  $600,000 
and  that  it  is  divided  by  the  method  just  explained  so  that 
$500,000  or  an  average  of  $500  to  a  man  is  assigned  as  wages, 
and  $100,000,  or  ten  per  cent.,  is  assigned  to  capital  goods  as 
interest.  These  rates  of  wages  and  interest  measure  the  pro- 
ductiveness of  capital  goods  and  workers  as  determined  by 
comparisons  at  those  points  where  they  may  be  substituted  for 
each  other.     Now  suppose  that  instead  of  consuming  its  entire 


262  Distribution :  Interest 

income  the  community  saves  ten  per  cent,  of  it,  that  is,  acts  in 
such  a  way  that  ten  per  cent,  of  the  net  product  of  the  year's 
business  will  take  the  form  of  new  capital  goods  to  be  added 
to  the  continuously  renewed  original  stock  of  capital  goods,  and 
only  the  remaining  ninety  per  cent,  of  the  product  the  form  of 
consumers'  goods.  This,  it  nmst  be  noted,  involves  psycho- 
logical changes  in  the  people,  but  why  these  occur  we  need  not 
here  inquire.  Let  the  population  meantime  merely  renew  itself 
so  that  there  are  still  1000  workers.  The  total  capital  for  the 
second  year's  industry  is  now  $1,060,000.  The  addition  of  the 
new  capital  will  tend  at  once  to  lower  the  rate  of  interest.  The 
free  loanable  fund  is  larger,  and  those  controlling  it  as  it 
arises,  bankers,  etc.,  will  compete  against  each  other  to  induce 
entrepreneurs  to  take  it.  As  interest  goes  down  wages,  on 
the  other  hand,  will  tend  to  go  up.  To  utilise  the  new  capital 
to  best  advantage  more  workmen  are  needed,  and  entrepre- 
neurs to  whom  the  capital  is  entrusted  will  compete  against 
each  other  in  hiring  workmen.  These  are  temporary  effects. 
To  decide  whether  they  will  remain  as  permanent  results  after 
the  new  capital  has  been  assimilated  by  the  producing  mechan- 
ism we  must  consider  how  the  productiveness  of  units  of  capital 
and  units  of  labour  under  the  new  conditions  will  compare  with 
their  productiveness  before  tlie  change.  The  addition  of 
$60,000  to  the  capital  fund  will  cause  a  recasting  of  the  whole 
capital-goods  equipment  of  the  society.  The  $1,000,000  worth 
of  capital  was  already  embodied  in  the  most  needed  forms  of 
tools,  machines,  etc.  Since  there  are  no  new  workers  the  new 
capital  must  be  embodied  in  less  needed  forms  to  supplement 
the  old  forms  that  continue  to  be  renewed,  or  else  must  be 
combined  with  the  old  capital  released  as  old  capital  goods 
wear  out  to  replace  these  old  forms  with  new  and  more  costly 
tools,  machines,  etc.,  that  are  more  efficient,  but  not  to  the  full 
extent  of  their  increased  prices.  Incidentally  some  of  the  new 
capital  goods  will  be  used  for  purposes  for  which  workmen 
were  previously  employed  before  they  became  relatively  so 
scarce.  The  productiveness  of  capital  goods  in  the  marginal  uses 
to  which  capital  is  put  will,  in  the  absence  of  improvements  in 
methods  of  production,  be  lessened  by  these  changes.  The 
forms  of  capital  goods  which  it  now  pays  to  use  are  less 


Interdependence  of  Wages  and  Interest     263 

needed.  They  add  less  to  the  product  of  industry  and  those 
who  supply  them  must  be  content  with  less  interest.  But  if 
interest  falls  at  one  point  it  must,  for  reasons  already  ex- 
plained, fall  over  the  entire  industrial  field  before  adjustment 
is  complete.  Hence  we  may  conclude  that  the  fall  in  the  rate 
of  interest  noted  as  a  temporary  efTect  of  the  increase  of  capi- 
tal will  prove  permanent. 

But  bv  so  much  as  capital  in  the  illustration  has  lost  in  rela-  An 

'  ••In  crG3.SG 

tive  importance,  labour  has  gained.    With  their  superior  equip-  ,,f  capital 

ment  workmen  can  produce  at  least  as  much  more  than  before  increases 

.the 
as  corresponds  to  the  productiveness  of  the  new  capital  goods.  Marginal 

Suppose  that  the  fall  in  the  rate  of  interest  amounts  to  1-2  per  Productive- 

ness  of 
cent.     Then  the  total  deduction  from  the  year's  product  on  ac-  Labour 

count  of  interest  will  be  9  1-2  per  cent,  of  $1,060,000,  or  $100,- 
700,  of  which  91-2  per  cent,  of  $60,000,  or  $5700,  will  repre- 
sent the  addition  to  the  product  ascribable  to  the  new  capital. 
The  total  product  of  the  year's  industry  will  be  the  old  product, 
$600,000,  plus  at  least  this  new  product,  $5700,  or  $605,700. 
Since  of  this  only  $100,700  is  now  deducted  for  interest  the  re- 
mainder, or  $505,000,  will  go  to  the  1000  workers  as  wages, 
or  each  will  receive  on  the  average  $505  a  year  instead  of  the 
$500  previously  earned.  They  are  the  same  men  working  no 
harder  than  before,  but  the  increased  supply  of  capital  has  in- 
creased their  relative  importance  and,  therefore,  the  share  of 
the  product  economically  ascribable  to  the  part  they  play  in 
production.  In  such  a  community  capital  might  conceivably 
be  increased  until  every  known  kind  of  capital  good  capable  of 
earning  enough  for  its  own  replacement  was  added  to  the  com- 
munity's equipment  and  interest  was  lowered  to  nothing.  Each 
addition  to  capital  would  increase  the  relative  importance  of 
labour  and  by  the  time  interest  was  eliminated  wages  would 
have  assumed  princely  proportions,  although  the  workmen  re- 
mained the  same  sort  of  men  and  continued  to  exert  them- 
selves no  more  than  when  their  earnings  averaged  but  $500  a 
year. 

This  assumed  case  is  entirely  hypothetical  and  the  figures  The  Mutual 
used  are  to  be  considered  as  illustrative  rather  than  as  mathe-  pen^dence 
maticallv  exact,  but  the  fundamental  relation  between  wages  of  Shares 
and  interest  which  it  indicates  is  believed  to  be  true  of  actual  bution 


264  Distribution :   Interest 

industrial  society.  The  introduction  of  rent  and  other  com- 
pHcations  will  not  alter  this  fundamental  relation.  The  pro- 
ductiveness of  labour  will  still  depend  not  merely  upon  the 
richness  of  land  and  natural  resources  at  the  margin  of  culti- 
vation and  upon  the  number  and  efficiency  of  the  workmen, 
but  also  upon  the  kinds  of  capital  goods  in  use  and  the  quantity 
of  capital.  A  change  in  any  one  of  these  factors  will  alter  the 
economic  importance  of  every  other  and  consequently  the  share 
of  the  joint  product  that  is  economically  ascribable  to  it  as  its 
share.  It  follows  that  a  complete  explanation  of  the  rate  of 
wages  or  of  the  rate  of  interest  must  include  a  consideration  of 
the  causes  which  control  the  supply  of  workmen  or  the  growth 
of  population  and  the  supply  or  increase  of  capital.  Before 
adding  this  last  link  to  the  chain  of  explanation  necessary  to  a 
complete  theory  of  distribution,  it  will  be  desirable  to  review 
briefly  the  ground  already  covered  and  to  meet  certain  objec- 
tions.    This  is  the  task  of  the  next  chapter. 

REFERENCES  FOR   COLLATERAL   READING 

^Clark,  The  Distribution  of  Wealth, Chaps.  IX.,  X.,  and  XVII. -XXIII. 
*  Mar  shall.  Principles  of  Economics,  Book  VL,    Chaps.  VI.-YIII. 
Hadley,  Economics,  Chap.  IX.;  Pierson,  Principles  of  Economics 
Parti.,  Chap.  IV.;  *Carver,   The  Distribution   of  Wealth,  Chap, 
VI.;  *  Johnson,  Money  and  Currency,  Chap,  on  Interest. 


CHAPTER   XV 
VALUE,   PRICE,    AND    DISTRIBUTION 


8  iqi.  We  have  now  surveyed,  in  broad  outline,  the  whole  Summary 
.  -      ,  .  ,.,,...,.  ,  of  Theory 


ory 
ue 


field  of  consumption,  production,  and  distribution,  and  are  pre-  of  val 
pared  to  discuss  the  ultimate  determinants  of  economic  rela- 
tions. We  have  seen  that  men  habitually  value  goods  not  as 
aggregates,  but  as  divided  up  into  distinguishable  units,  such  as 
pounds  or  bushels,  and  that  the  values  they  ascribe  to  these 
units  are  in  proportion  to  their  marginal  utilities.  We  have  seen 
that  in  industrial  society  making  valuations  is  a  social  process. 
It  is  not  the  marginal  utility  of  each  good  to  each  consume: 
that  determines  its  value,  but  the  marginal  utility  of  each  good 
to  consumers  as  a  whole.  Moreover,  goods  are  valued  as 
bundles  of  utilities  by  adding  together  the  marginal  utilities  of 
their  different  qualities  to  the  groups  which  are  just  able  to 
command  those  qualities.  Thus  the  rich  accept  in  large  meas- 
ure the  valuations  which  the  poor  place  upon  necessaries  and 
comforts,  and  confine  their  influence  to  the  valuation  of 
luxuries.  Socially  speaking,  however,  the  values  of  goods  are 
determined  by  their  marginal  utilities. 

From  the  point  of  view  of  consumption,  value  in  use,  the  re-  Exchange 
lation  between  goods  and  men,  is  all-important.  In  produc-  ^j'^^^pj-j^e 
tion  and  distribution  its  derivative,  value  in  exchange,  con- 
cretely represented  by  price,  holds  the  forefront  of  interest. 
The  exchange  value  of  a  good  is  its  power  to  command  other 
goods  in  exchange  for  itself.  Price  is  exchange  value  in  terms 
of  the  good  used  as  a  medium  of  exchange,  or  money.  So 
long  as  money  is  invariable  in  its  exchange  value  or  purchas- 
ing power  as  regards  goods  generally,  money  prices  are  accu- 
rate measures  of  exchange  values.  Such  invariability  is 
assumed  as  a  means  to  simplifying  economic  analysis  in  this 
as  in  previous  chapters. 

The  determination  of  money  prices  was  shown  to  result  from 

265 


266  Value,  Price,  and  Distribution 


The  Law 
of  Price 


Relation 
between 
Incomes  of 
Consumers 
and  the 
Expenses 
of 
Production 


The 

Influence 
of 

Monopoly 
upon  the 
Shares  of 
Income 
Secured 
in  Com- 
petitive 
Industries 


bargaining  and  competition  among  buyers  and  sellers  and  it 
was  found  that  laws  of  price  might  be  formulated  from  the 
point  of  view  of  either.  From  the  side  of  buyers  the  tendency 
is  for  price  to  correspond  with  the  money  equivalent  of  the 
marginal  utility  to  the  marginal  buyer  of  the  good  purchased. 
It  thus  depends  in  part  upon  buyers'  scales  of  wants  and  in 
part  upon  the  sums  of  money  which  they  have  to  spend.  From 
the  side  of  sellers  the  law  of  price  depends  upon  the  conditions 
of  production.  Under  conditions  of  monopoly  the  tendency  is 
for  the  monopolist  to  charge  the  price  calculated  in  the  long 
run  to  afford  the  largest  monopoly  profit.  Under  conditions 
of  free  competition,  on  the  other  hand,  the  price  tends  to  cor- 
respond with  the  expenses  of  production  to  representative 
firms.  The  actual  price  is  usually  somewhat  above  or  some- 
what below  this  normal  and  allows  for  a  competitive  profit  or 
loss  to  the  entrepreneur. 

These  laws  of  price  leave  unconnected  two  factors  that  are 
intimately  related  to  each  other — the  sums  of  money  which 
buyers  have  to  spend  and  the  profits  and  expenses  of  produc- 
tion which  figure  in  the  calculations  of  sellers.  Generally 
speaking  these  are  the  same  sums  of  money,  for  what  buyers 
spend  is  their  money  incomes,  and  money  incomes  arise  because 
of  the  part  which  those  who  receive  them  play  in  production. 
They  are  either  profits,  rents,  wages,  or  interest.  To  bridge 
over  this  gap  in  the  explanation  of  prices  and  in  so  doing  to 
supply  a  complete  theory  of  value  and  price  is  the  task  of  the 
theory  of  distribution.  It  recognises  that  buyers  and  sellers, 
consumers  and  producers,  are,  in  general,  the  same  individuals 
and  that  the  whole  machinery  of  buying  and  selling  is  simply 
a  convenient  means  of  combining  effectively  the  various  factors 
in  production  and  of  assigning  the  appropriate  shares  of  the 
product  to  those  who  have  claims  upon  it. 

§  152.  The  presence  of  monopoly  in  any  branch  of  produc- 
tion makes  possible  the  maintenance  of  prices  above  the  ex- 
penses of  production  and  the  enjoyment  of  monopoly  profit. 
It  is  important  to  perceive  just  what  effect  such  a  profit  has 
upon  the  other  shares  in  distribution.  As  already  explained,  the 
only  way  in  which  a  monopolist  can  hold  up  prices  is  by  cur- 
tailing the  supply  of  the  monopolised  good  he  offers  for  sale. 


The  Influence  of  Monopoly  267 

Buyers  will  take  a  certain  quantity  of  the  good  at  the  low  price 
just  covering  its  expense  of  production.  If  a  higher  price  is 
asked  they  will  take  less.  Monopoly  price  means  therefore  a 
smaller  volume  of  sales  than  that  which  might  be  efifected  at 
cost  and  a  corresponding  curtailment  of  production.  Cur- 
tailed production  means  in  turn  reduced  employment  of  the 
factors  of  production,  land,  labour,  and  capital,  in  the  branch 
of  business  affected,  or  a  larger  supply  of  these  factors  for 
competitive  industries.  If  the  rise  of  a  monopoly  is  unaccom- 
panied by  any  other  changes,  such  as  the  decline  of  other 
monopolies,  the  opening  up  of  new  lands,  or  a  reduction 
of  population,  its  effect  will  be  to  crowd  labour  and  capital 
into  other  branches  of  production  where  they  find  employment 
only  through  an  enlargement  of  the  volume  of  production.  If 
the  law  of  diminishing  returns  is  in  operation,  this  will  mean 
a  lowering  of  the  margin  of  production  and  a  lessening  of  the  • 

joint  share  upon  the  size  of  which  the  rates  of  wages  and 
interest  depend.  Under  such  circumstances  the  rise  of  mo- 
nopoly profits  tends  to  increase  rent  and  to  reduce  wages  and 
interest.  From  the  point  of  view  of  the  whole  community 
monopoly  profit  thus  signifies  an  uneconomical  distribution  of 
the  factors  of  production  and  a  smaller  product  at  the  margin  -^ 
to  be  shared  between  labour  and  capital.  This  loss  to  labour  and 
capital  applies  as  well  to  wage-receivers  and  interest-receivers 
who  boycott  the  products  of  monopoly  as  to  those  who  buy 
those  products  and  thus  incur  a  further  tax  in  the  excessive 
price  they  have  to  pay  for  them.  It  must  not  be  inferred  from 
this  analysis  that  the  effects  ascribed  to  monopoly  are  com- 
monly experienced  in  modern  progressive  communities.  Mod- 
ern monopolies  derive  their  profits  less  frequently  by  actually 
raising  prices  than  by  lowering  their  expenses  of  production 
and  hence  they  tend  not  so  much  to  reduce  wages  and  interest 
as  to  prevent  them  from  rising  to  the  extent  that  they  might 
if  the  economies  of  concentrated  production  and  prices,  deter- 
mined by  the  expense  of  production,  could  be  enjoyed  together. 

§  153.  In  order  to  restate  the  laws  determining  rent,  wages,  Graphic 
and  interest  it  will  be  necessary  to  advert  for  the  last  time  to  tatlon  of  ' 

the  relations  that  would  prevail  in  an  industrial  societv  brought  Production 

,  .  ,  .,.,     .  T  ,  .  '        ,      "        and  Dis- 

to  the  state  of  normal  equilibrunn.     in  such  a  society  the  re-  tribution 


268 


Value,  Price,  and  Distribution 


lation  between  production,  distribution,  and  consumption 
would  be  extremely  simple.  Production  would  still  be  carried 
on  as  a  serial  process,  but  it  could  be  readily  analysed,  since 
all  prices  would  correspond  exactly  to  the  expenses  of  produc- 
tion and  these  would  never  vary.  The  whole  matter  may  be 
represented  graphically  by  the  following  figure: 


Fig.  9. 

In  the  above  figure  production  is  represented  as  subdivided 
into  three  great  stages.  A,  B,  and  C.  The  extractive  industries 
(A)  turn  out  raw  materials.  ]\Ianufacturing  (B)  takes 
these  and  transforms  them  into  manufactured  products. 
Transportation  and  trade  (C)  deliver  the  latter  as  finished 
products  to  purchasers,  who  may  be  either  consumers  con- 
verting their  money  incomes  into  real  incomes,  or  entre- 
preneurs converting  the  free  replacement  fund  into  capital 
goods  to  restore  the  wastes  incidental  to  production.  The 
figure  represents  movement  without  change.  Goods  are 
flowing  continuously  from  stage  A  to  B  and  from  stage  B  to 
C.     At  C  the  stream  is  divided,  an  unvarying  volume  of  capital 


Restatement  of  the  Law  of  Rent        269 

goods  flowing  one  way  and  an  unvarying  stream  of  consumers' 
goods  flowing  the  other.  The  capital  goods  exactly  replace 
the  goods  destroyed  in  the  course  of  production  and  the  con- 
sumers' goods  exactly  remunerate  the  owners  of  land,  work- 
men, and  owners  of  capital  goods  for  the  productive  services 
which  they  or  their  possessions  have  rendered.  Finally  the 
prices  of  goods  are  invariable  and  everywhere  just  equal  to 
their  unvarying  expenses  of  production. 

§  154.  How  the  expenses  of  production  are  determined  was  Restate- 
explained  in  the  last  three  chapters.  A  brief  restatement  will  the  Law 
suffice  to  recall  the  principal  points.  Rent  is  paid  for  the  serv-  of  Rent 
ices  which  different  pieces  of  land  perform  in  production.  On 
the  one  hand  are  the  various  uses  to  which  human  wants  and 
prevailing  methods  of  production  cause  pieces  of  land  to  be 
put.  On  the  other  are  the  quantities  of  land  of  different  quali- 
ties and  in  different  situations.  The  most  suitable  pieces  of 
land  are  assigned  to  the  most  important  uses.  To  them  are 
added  less  suitable  pieces  down  to  a  margin  where  a  given 
piece  is  equally  valuable  for  some  other  use.  If  assigned  to 
the  first  use  the  given  piece  must  command  a  rent  equal  to  what 
it  was  worth  for  the  other  use,  as  shown  by  comparing  it  with 
other  pieces  actually  devoted  to  that  use.  This  rent  is  a  "  mar- 
ginal rent  "  for  all  pieces  of  land  assigned  to  the  first  and  most 
important  use.  To  it  are  added  differentials  measuring  the 
superiority  of  pieces  of  land  above  this  margin  to  determine 
their  respective  rents.  The  same  process  of  comparison  applied 
to  pieces  of  land  good  enough  only  for  inferior  uses  serves  to 
determine  their  rents.  At  the  very  bottom  of  the  scale  are 
found  pieces  of  land  for  wdiich  there  are,  economically  speak- 
insf,  no  alternative  uses.  The  "  margin  of  indifference  "  for 
this  lowest  grade  of  land  is  the  point  where  it  does  rot  matter 
economically  whether  the  land  is  cultivated  or  allowed  to  lie 
waste.  At  this  point  pieces  of  land  can  command  no  rent. 
Economically  speaking  they  are  superabundant  and,  therefore, 
free.  From  this  lowest  no-rent  margin  of  indifference  the 
rents  of  all  better  or  more  favourably  situated  pieces  of  land 
are  measured.  Rent  is  the  differential  which  indicates  their 
position  in  the  economic  scale.  From  the  point  of  view  of  price 
it  is  the  share  of  the  total  price  that  is  economically  ascribable 


Restate- 
ment of 
the  Law 
or  Wages 


The 

Wages  of 
Marginal 
Workmen 


270  Value,  Price,  and  Distribution 

to  the  land  itself.  If  this  share  is  large  it  indicates  that  the 
land  serves  an  important  industrial  use  and  that  land  equally- 
well  adapted  to  this  use  is  scarce. 

§  155.  Wages  are  paid  to  workmen  for  their  services  in  pro- 
duction. Their  determination  results  from  calculations  closely 
similar  to  those  that  are  made  in  connection  with  rent,  but  the 
matter  is  more  complicated  because  workmen  are  more  adapt- 
able to  different  uses  than  are  pieces  of  land,  and  because  the 
number  of  workmen  of  different  grades  is  more  fully  subject 
to  himian  control.  Moreover,  the  margin  of  indifference  for 
workmen  is  not  that  between  the  least  important  tasks  to  which 
workmen  of  the  lowest  grade  are  assigned  and  tasks  of  no  eco- 
nomic Importance,  but  between  these  tasks  and  less  important 
ones  that  are  ruled  out  economically  by  the  scarcity  of  work- 
men even  of  the  lowest  grade.  As  in  the  case  of  pieces  of  land, 
so  in  the  case  of  workmen,  there  are  on  the  one  side  the  various 
employments  for  workmen  of  different  grades  determined  by 
the  wants  of  consumers  and  the  current  methods  of  production, 
and  on  the  other  the  number  of  workmen  of  each  grade  fitted 
for  these  employments.  Wages  are  determined  by  compari- 
sons just  as  are  rents,  only  the  basis  from  which  all  higher 
wages  are  measured  is  not  no-wage,  but  low-wage  workmen. 

A  complete  theory  of  wages  has  to  explain  not  only  existing 
differences  in  rates  of  wages  and  the  law  by  which  marginal 
wages  are  fixed,  but  also  why  these  differences  persist.  This 
we  undertook  to  do  by  reference  to  the  diverse  standards  of 
living  found  in  each  community  and  the  influence  of  these 
standards  in  controlling  the  growth  of  population  and  deter- 
mining the  industrial  qualifications  of  the  members  of  each 
successive  generation  of  the  world's  workers.  Marginal  wages 
were  shown,  on  the  other  hand,  to  be  determined  by  compari- 
sons between  the  productiveness  of  workmen  and  of  capital 
goods.  At  the  margin  of  production  where  no  rent  is  paid 
there  is  a  product  to  be  divided  between  labour  and  capital. 
The  size  of  this  product  is  the  primary  consideration  upon 
which  rates  of  wages  and  interest  depend,  and,  as  was  shown, 
this  is  influenced  largely  by  the  location  of  the  margin  of  pro- 
duction. If  the  number  of  the  population  is  not  so  great  com- 
pared with  the  natural  resources  of  the  country  as  to  force  a 


The  Law  of  Interest  271 

resort  to  inferior  lands,  mines,  etc.,  the  no-rent  margin  will  be 
located  at  a  point  where  workmen  and  capital  goods  reap  a 
large  return.  In  the  division  between  workmen  and  capital 
goods  the  location  of  the  margin  of  indifference  between  them 
is  the  important  consideration.  This  depends  in  part  on  the 
number  and  efficiency  of  the  labouring  population  and  in  part 
upon  the  quantity  and  quality  of  the  capital  goods  used  in  pro- 
duction. In  general  the  law  is  that  each  factor  obtains  as  its 
share  of  the  price  of  the  product  an  amount  corresponding  to 
what  it  has  produced.  Each  factor,  in  other  words,  gets  the 
equivalent  of  its  own  product  measured  not  absolutely,  but,  in 
the  only  way  that  it  can  be  measured,  comparatively.  Wages 
above  the  marginal  rate  also  correspond  to  what  the  workmen 
who  receive  them  have,  economically  speaking,  produced. 
They  indicate  the  place  each  worker  holds  in  the  scale  of  pro- 
ductiveness. In  reference  to  wages  as  a  whole,  then,  as  in 
reference  to  rent,  we  conclude  that  the  law  is  for  each  work- 
man to  get  the  share  of  the  price  of  the  product  that  he 
has  himself  contributed. 

§  156.  Interest  is  what  is  paid  to  the  owners  of  capital  goods  The 
as  remuneration  for  the  services  these  goods  render  in  produc-  J^^^^'j-gg^ 
tion.  The  great  mobility  of  capital,  which  results  from  the 
constant  destruction  and  replacement  of  capital  goods,  causes 
the  latter  to  be  available  for  each  use  for  which  they  are  fitted 
in  about  the  same  proportionate  quantity.  In  the  assumed 
state  of  equilibrium  the  distribution  of  capital  over  the  whole 
industrial  field  would  be  perfect.  Capital  goods  would  be  sup- 
plied for  each  use  down  to  the  point  where  the  interest  they 
afforded  just  equalled  the  interest  earned  by  other  capital  goods 
in  other  branches  of  production,  and  there  would  be  one  uni- 
form rate  of  interest  over  the  whole  industrial  field.  This  rate 
is  determined  in  the  same  way  as  is  the  marginal  rate  of  wages, 
by  comparing  the  productiveness  of  capital  goods  with  that 
of  workmen.  At  the  margin  of  indifiference,  where  cither 
may  be  used  indifferently  for  given  purposes,  the  balance  is 
struck  between  them.  The  location  of  this  margin  depends,  as 
already  stated,  upon  the  number  and  efficiency  of  the  labouring 
population  and  the  quantity  and  quality  of  the  capital  goods 
used,  and  also  upon  all  of  the  influences  that  determine  the 


The 

Calculation 
of  the  Re- 
placement 
Fund 


The  Life 
Period  of  a 
Capital 
Good 
Depends 
upon  Rates 
of  Wages 
and 
Interest 


272  Value,  Price,  and  Distribution 

amount  of  the  joint  share  which  labour  and  capital  divide 
between  them  at  the  margin  of  production. 

There  are  certain  difficulties  which  suggest  themselves  in  con- 
nection with  this  explanation  of  interest  that  must  be  cleared 
up  at  this  point.  They  refer  to  the  calculation  of  the  replace- 
ment fund  which  each  capital  good  is  assumed  to  earn  along 
with  its  interest.  It  will  naturally  be  asked  just  how  the  amount 
of  the  total  replacement  fund  is  determined,  and,  secondly,  how 
the  proportion  that  must  be  assigned  to  this  fund  each  year  is 
fixed.  The  total  amount  of  the  replacement  fund  for  each  capi- 
tal good  equals,  obviously,  the  price  of  the  capital  good.  In  the 
state  of  equilibrium  assumed,  this  corresponds  exactly  to  the 
expense  of  producing  the  capital  good.  This  expense  might  be 
followed  back  in  thought  to  the  point  at  which  the  bare-handed 
savage  appropriated  from  the  storehouse  of  nature  the  material 
from  which  the  first  capital  good  was  fashioned  and  the  ex- 
pense of  production  consisted  wholly  of  wages,  but  it  is  equally 
logical  to  take  for  granted  the  conditions  determining  the 
prices  of  the  capital  goods  used  in  the  previous  stages  of  pro- 
duction and  make  these  the  starting  point  for  an  analysis  of 
present  relations.  The  total  replacement  fund  must  then  equal 
the  price  of  the  capital  good  to  be  replaced  as  xietermined  by  its 
expense  of  production. 

The  amount  to  be  set  aside  each  year  for  the  replacement  of 
a  capital  good  depends  upon  its  durableness  and  the  standard  of 
efficiency  which  it  must  maintain  in  order  to  make  its  continued 
use  profitable.  Circulating  capital  goods  must  be  completely 
replaced  as  they  are  used.  Fixed  goods  wear  out  at  var}dng 
rates  and  no  general  rule  can  be  advanced  in  reference  to  them. 
The  standard  of  efficiency  required  of  capital  goods  depends  in 
general  upon  the  location  of  the  margin  of  indifiference  between 
capital  goods  and  workmen.  If  this  is  such  that  the  rate  of 
interest  is  relatively  low  while  the  rate  of  wages  is  relatively 
high,  capital  goods  must  be  discarded  promptly  as  their  effi- 
ciency falls  below  a  certain  high  standard,  in  order  that  loss 
may  be  avoided.  This  is  because  in  most  of  their  employments 
capital  and  labour  work  together,  and  it  is  uneconomical  to 
equip  highly  paid  workmen  with  worn  and  inefficient  tools  and 
n.achines  when  the  use  of  new  tools  and  machines  may  be  had 


The  Law  of  Competitive  Distribution    273 

on  the  payment  of  a  low  rate  of  interest.  The  lower  the  rate  of 
interest,  accordingly,  or  the  higher  the  rate  of  wages,  the 
shorter  the  period  that  capital  goods  will  continue  to  be  used 
and  the  larger  the  periodic  allowance  for  their  replacement 
which  must  be  made  out  of  their  gross  earnings.  In  the  re- 
verse case,  that  is  when  interest  is  high  and  wages  are  low, 
tools  and  machinery  will  continue  to  be  used  for  a  much  longer 
interval  and  the  accumulation  of  the  replacement  fund  will  be 
spread  out  over  a  correspondingly  longer  period.  These  con- 
siderations explain  why  cheap  labour  and  old  and  inefificient 
cai)ital  goods  are  usually  found  together,  while  the  almost  cer- 
tain attendant  of  dear  labour  is  an  up-to-date  and  efficient 
equipment  of  capital. 

In  distinguishing  the  earnings  of  capital  goods  into  two  ele-  The  Law 
•  r       ,         1  1  r       1  1  1      of  Interest 

ments,  an  mterest  fund  and  a  replacement  fund,  we  have  merely  Applies  to 

followed  the  practice  of  the  business  communitv.    The  use  of  Gross 

i  ,•  r         T  '1  L     Earnings 

money  as  the  universal  meduim  of  exchange  causes  loans  to  be  of  Capital 

made  usually  in  money  rather  than  in  the  capital  goods  which  Goods 
the  borrower  actually  needs  in  his  business  and  ultimately  ob- 
tains by  purchase  with  the  money  borrowed.  The  replace- 
ment in  money  of  the  principal  borrowed  causes  interest  to 
stand  out  clearly  as  a  distinct  item  and  accounts  in  large  meas- 
ure for  the  practice  referred  to.  It  would  be  an  error,  however, 
to  conclude  that  the  earnings  of  capital  goods  assigned  to  the 
replacement  fund  obey  any  different  principle  than  those  as- 
signed to  interest.  Competition  tends  to  make  the  earnings 
devoted  to  both  uses  correspond  to  the  contributions  which 
capital  goods  make  to  the  price  of  the  product  and  in  the  as- 
sumed society  this  correspondence  would  be  perfect.  The  law 
of  interest  applies,  therefore,  as  well  to  the  gross  as  to  the  net 
earnings  of  capital  goods,  and  it  may  be  laid  down  as  a  gen- 
eral principle  for  capital  goods,  as  for  pieces  of  land  and 
workmen,  that  they  tend  to  receive  as  their  shares  of  the  price 
of  the  product  amounts  corresponding  to  what  they  contribute 
to  production. 

The  general  law  of  competitive  distribution  for  a  society  J,^^^f^^* 
iS"  ^  ment  or 

allowed  to  attain  the  state  of  normal  equilibrium  is.  then,  that  the  La\v  ot 
each  factor  in  production  has  assigned  to  it  a  share  in  distribu-  [^^,"^^^5; 
tion  corresponding  to  what  it  itself  produces.     If  rent,  wages,  tribution 


274  Value,  Price,  and  Distribution 

and  interest  be  defined  as  the  prices  paid  respectively  for  the 
services  to  production  of  pieces  of  land,  workmen,  and  capital 
goods,  the  law  may  be  stated  to  be,  that  competition  tends  to 
put  a  price  on  the  services  of  each  of  the  factors  of  production 
corresponding  to  the  price  which  attaches  to  its  particular  con- 
tribution to  the  product.  In  actual  industrial  society,  as  has 
already  been  pointed  out,  economic  relations  fall  far  short  of 
this  competitive  ideal.  Monopoly  influences  intervene  to  secure 
monopoly  profits  for  some  entrepreneurs  at  the  expense  of  the 
shares  assigned  to  wages  and  interest.  Changes  occur  to  throw 
the  whole  mechanism  of  production  out  of  adjustment  and  to 
occasion  profits  or  losses  to  other  entrepreneurs  which  must  in 
time  be  distributed  among  all  participants.  Special  obstacles 
prevent  certain  groups,  especially  among  the  labouring  popula- 
tion, from  getting  the  full  benefit  of  the  influence  of  competi- 
tion and  make  their  earnings  less  than  they  ought  economically 
to  be.  Full  account  must  be  taken  of  these  and  other  influ- 
ences when  it  is  attempted  to  make  practical  application  of  eco- 
nomic theories,  as  in  the  later  chapters  of  this  book.  Not- 
withstanding them,  the  law  of  competitive  distribution  which 
has  been  explained  remains  the  norm  to  which  actual  relations 
tend  always  to  adjust  themselves.  Its  mastery  is  preliminary 
not  only  to  a  thorough  understanding  of  prevailing  conditions, 
but  to  any  intelligent  effort  towards  improving  those  conditions 
as  they  affect  the  mass  of  men.  No  apology  need  therefore  be 
offered  for  the  prolonged  attention  which  the  reader  has  been 
asked  to  give  to  a  hypothetical  society  which,  as  is  freely  ad- 
mitted, will  never  exist  outside  of  the  imagination  of  the 
economist. 
The  Same  §  157.  Up  to  this  point  in  the  analysis  of  competitive  dis- 
eraUsed"'  tribution  constant  reference  has  been  made  to  the  tendency  of 
unrestricted  competition  to  cause  the  prices  at  which  goods  are 
sold  to  correspond  to  the  expense  to  representative  firms  of 
producing  them.  This  expense  of  production  has  been  analysed 
into  its  elements,  rent,  wages,  and  interest,  and  through  this 
device  these  shares  have  themselves  been  explained.  We  are 
now  ready  to  take  a  somewhat  broader  view  of  the  relation  be- 
tween value  and  distribution  and  to  recognise  that  what  we 
have  styled  the  expense  of  production  is  nothing  more  than  the 


Distribution  a  Form  of  Valuation        275 

sum  of  the  values  of  the  goods  which  co-operate  in  production 
and  that  the  same  t^eneral  law  of  valuation  runs  through  every 
stage  of  the  process. 

On  the  one  hand  are  consumers  with  certain  scales  of  wants  True 
to  be  satisfied  and  with  certain  sums  of  money  to  spend  on  between 
their  satisfaction.  Their  effective  demand  guides  entrepre-  the 
neurs  in  correlating  the  factors  of  production,  on  the  other  Production 
hand,  so  as  to  turn  out  as  cheaply  as  possible  those  goods  and  Value 
which  can  be  sold  at  remunerative  prices.  The  factors  of  pro- 
duction, land,  labour,  and  capital,  are  available  only  in  limited 
quantities.  The  value  that  is  ascribed  to  the  productive  serv- 
ices of  each  piece  of  land,  each  workman,  and  each  capital  good 
depends  upon  the  contribution  it  is  able  to  make  towards  the 
production  of  those  goods  for  which  there  is  an  effective  de- 
mand on  the  part  of  consumers.  Entrepreneurs  correlate  the 
various  factors  and  through  the  substitutions  and  comparisons 
which  they  make  in  their  efforts  to  hit  upon  that  combination 
which  is  economically  most  efficient,  they  determine  the  divi- 
sion of  the  value  ascribed  to  the  joint  products  of  the  factors 
between  the  factors  themselves.  In  the  absence  of  monopoly 
and  of  changes  wdiich  prevent  competition  from  doing  its  per- 
fect work,  the  whole  value  of  the  products  of  industry  is  di- 
vided up  between  rent,  wages,  and  interest,  and  the  money  in- 
comes assigned  to  those  who  receive  these  shares  are  exactly 
exchanged  by  them  for  the  very  net  products  in  which  they 
originate.  The  exact  correspondence  between  value  and  the 
expense  of  production  which  is  found  in  each  branch  of  produc- 
tion under  these  conditions  is  not  to  be  explained  on  the  ground 
that  the  expense  of  production  determines  value.  It  w^ould  be 
more  accurate,  so  far  as  our  analysis  has  yet  proceeded,  to  say 
that  the  value  of  the  product  itself  determines  the  expense  of 
production  or  the  three  shares  into  which  such  value  is  divided. 

Value  originates  in  the  wants  of  consumers.     Only  things  The  Detei- 
which  minister  either  directly  or  indirectly  to  the  satisfaction  "hafes*'iu 
of  wants  have  value.     But  quite  as  important  as  ability  to  min-  Distribu- 
ister  to  the  satisfaction  of  wants  as  a  condition  to  value  is  limi-  Complex 
tation   of   supply.     Goods   that   are   superabundant  are   free.  Form  of 
Only  those  whose  available  supplies  fall  short  of  the  demand 
for  them  are  valuable.     The  cause  of  limitation  of  supply  is  to 


The  Pro- 
ductivity 
Theory  of 
Distri- 
bution 


276  Value,  Price,  and  Distribution 

be  found  usually  in  the  conditions  of  production.  In  the  ab- 
sence of  monopoly  each  branch  of  production  receives  through 
the  agency  of  competition  its  proportion  of  land,  labour,  and 
capital.  The  reason  why  the  services  of  these  factors  must  be 
paid  for,  or  have  value,  ordinarily,  is  that  they  are  limited  in 
supply.  Superior  land  is  always  so  limited.  In  the  United 
States  land  of  inferior  quality  is  still  superabundant.  Such 
land  has  in  consequence  no  value  and  commands  no  rent.  It 
gives  rise  to  a  no-rent  margin  from  which  the  value  of  the  pro- 
ductive services  of  superior  pieces  of  land  may  be  calculated. 
Skilled  labour  is  limited  as  is  superior  land.  In  the  United 
States,  as  in  other  countries,  the  supply  of  workmen  even  of 
the  lowest  grade  is  insufficient  to  meet  the  demand  for  the  pro- 
ductive services  which  such  workmen  can  perform.  In  con- 
sequence the  services  of  such  workmen  are  valuable  and 
they  can  command  wages.  The  supply  of  capital  is  also 
limited  in  comparison  with  the  demand  for  it.  This  makes 
the  services  even  of  the  least  efficient  capital  goods  valuable 
and  enables  their  owners  to  obtain  interest  for  their  use.  Thus 
at  every  stage  value  is  the  joint  result  of  capacity  to  contribute 
to  the  satisfaction  of  human  wants  and  limitation  of  the  supply, 
and  its  explanation  in  the  manifestations  we  have  styled  rent, 
wages,  and  interest  is  no  different  from  its  explanation  in  the 
case  of  simple  consumable  goods. 

§  158.  The  theory  of  competitive  distribution  that  has  been 
explained  in  this  and  the  preceding  chapters  is  commonly  de- 
scribed as  the  "  productivity  theory  "  on  the  ground  that  it 
undertakes  to  account  for  the  shares  assigned  to  the  different 
claimants  by  reference  to  the  contributions  which  they  have 
made  to  production.  Although  endorsed  by  many  leading 
American  and  foreign  economists,  it  is  not  universally  accepted. 
Among  rival  theories,  that  which  undoubtedly  holds  first  place 
is  the  "  exchange  theory,"  ably  presented  as  regards  interest, 
or  the  share  of  wealth  assigned  to  capital,  by  the  Austrian 
economist,  Professor  Eugen  von  Bohm-Bawerk,  in  his  two 
books,  Capital  and  Interest  and  The  Positive  Theory  of  Capi- 
tal. The  objections  which  this  distinguished  writer  urges 
against  the  productivity  theory  can  best  be  indicated  by  a  brief 
review  of  the  exchange  theory  which  he  himself  offers  as  a 


Interest  a  Discount  on  Future  Goods     277 

substitute.     If  it  can  be  shown  that  there  is  no  real  opposition 

between  tliis  and  the  prockictivity  theory,  the  conclusions  of 

both  will  be  strengthened. 

In  his  explanation  of  interest,  Professor  Bohm  starts  out  '^^^^ 
...  ...  .         ,         ,..,...,  E.xchange 

With  the  entirely  just  contention  that  distribution  is  simply  one  Theory  of 

segment  in  the  completed  circle  of  exchanges  by  which  eco-  pi^ti"'- 
nomic  relations  are  controlled  in  an  industrial  society  in  which 
each  produces  not  for  himself,  but  for  the  market.  He  applies 
this  thought  to  the  interest  problem,  as  follows :  the  entrepre- 
neur by  purchasing  the  appropriate  kinds  of  capital  goods  and 
combining  them  with  land  and  labour  may,  under  normal  con- 
ditions, realise  a  product  whose  price  covers  all  of  his  expenses 
and  leaves  over  an  interest  on  the  capital  invested.  Interest  is 
thus  the  difference  between  the  price  of  capital,  or  "  future 
goods,"  and  that  of  the  products,  or  "  present  goods,"  into 
which  they  will  ripen  if  managed  with  ordinary  business 
prudence.  It  will  be  noted  that  his  characterisation  of  inter- 
est is  different  in  terms  rather  than  in  essence  from  that 
given  in  the  text.  Instead  of  saying,  as  we  have  done,  that 
capital  goods  produce  present  goods  worth  more  than  them- 
selves, that  is,  an  interest  over  and  above  their  own  replacement 
fund.  Professor  Bohm  asserts  that  the  present  value  of  capital 
goods  is  less  than  is  normally  the  value  of  the  goods  into  which 
they  will  be  transformed  by  the  process  of  production.  In  the 
former  case  the  difference  in  value  is  ascribed  without  any  at- 
tempt at  analysis  to  the  productiveness  of  capital  goods ;  in  the 
latter  its  explanation  is  sought  in  the  idiosyncrasies  of  valu- 
ation. 

Pursuing  his  inquiry,  Professor  Bohm  concludes  that  the  Interest 
explanation  of  interest  lies  in  the  tendency  of  men  to  value  qjj  Future 
present  goods  more  highly  than  equivalent  future  goods  and  Goods 
that  the  rate  of  interest  is  simply  the  rate  at  which  men  dis- 
count the  latter  in  comparing  them  with  the  former.*    This  ap- 
pears to  be  a  very  different  proposition  from  that  in  the  text 
that  the  rate  of  interest  is  the  ratio  between  the  value  of  the  net 
products  of  capital  goods  and  the  value  of  those  goods  them- 
selves, but  if  it  can  be  shown  that  Professor  Bohm's  rate  of 
discount  depends,  at  last  analysis,  on  the  productiveness  of 
*  This  tendency  was  discussed  in  Section  36,  Chapter  IV. 


278 


Value,  Price,  and  Distribution 


The 

Exchange 
Theory 
True  from 
Viewpoint 
of  Lenders 


The 

Sense  in 
which 
Capital 
Goods  are 
Productive 


capital  goods  the  seeming  opposition  between  the  two  views 
will  be  reconciled. 

In  the  determination  of  the  rate  of  interest,  as  in  the  deter- 
mination of  every  other  rate  with  which  economics  has  to  do, 
there  are  two  parties  to  be  considered,  lenders  or  capitalists, 
who  supply  capital  goods,  and  borrowers  or  entrepreneurs, 
who  turn  them  to  productive  account.  The  exchange  theory 
of  interest  views  the  phenomenon  primarily  from  the  view- 
point of  lenders.  Interest  is  a  premium  that  is  constantly 
offered  by  the  present  organisation  of  industrial  society  to 
those  who  will  convert  their  incomes  into  future  goods  in- 
stead of  present  goods,  or  save  and  invest  instead  of  spend.  If 
men  did  not  discount  future  goods,  all  incomes  would  be  saved 
as  long  as  interest  could  be  earned  in  this  way.  That  this  does 
not  happen  is  a  sure  indication  of  the  truth  of  the  principle 
upon  which  the  exchange  theory  rests.  It  is  equally  obvious 
that  whenever  and  as  often  as  the  current  rate  of  interest  ex- 
ceeds the  rate  at  which  men  discount  future  goods,  income 
will  be  saved  and  invested  and  that  the  tendency  in  a  competi- 
tive society  will  be  for  the  supply  of  capital  goods  to  be  kept 
at  just  that  level  at  which  the  rate  of  interest  and  the  rate  of 
discount  are  equal.  From  the  side  of  lenders  or  capitalists,  ac- 
cordingly, the  law  of  interest  is  that  presented  by  the  exchange 
theory. 

The  productivity  theory  is  based  on  a  study  of  interest  from 
the  viewpoint  of  borrowers  or  entrepreneurs.  They  know 
from  experience  that  capital  goods  are  productive  in  the  sense 
that  under  the  direction  of  men  of  average  prudence  they  may 
be  made  to  afford  interest.  This,  as  explained  in  the  chapters 
on  production,  is  because  roundabout,  serial,  or  capitalistic  pro- 
duction yields  a  larger  return  in  goods  in  proportion  to  the 
land  and  labour  used  than  direct  production.  Professor  Bohm 
recognises  this  fact  in  common  with  other  economists,  but  he 
objects  to  the  hasty  inference  that  because  more  goods  are  pro- 
duced by  the  aid  of  capital  the  value  of  the  aggregate  product 
is  necessarily  larger.  He  points  out  that  increasing  the  supply 
of  any  particular  good  tends  to  lessen  its  value  and  that  it  is 
even  possible,  by  increasing  the  supply  sufficiently,  to  remove  a 
good  from  the  domain  of  economic  calculation  altogether  and 


The  Two  Theories  Complementary      279 

make  it  free.  ]\Iay  not  the  larger  supply  of  goods  tha*^  results 
from  capitalistic  production  be  worth  actually  less  than  the 
smaller  supply  obtained  by  direct  production,  he  asks,  so  that 
there  is  actually  less  than  before  to  distribute  instead  of  more, 
as  the  productivity  theory  assumes?  The  answer  to  this  ob- 
jection is  that  while  multiplying  any  single  product  may  re- 
duce its  exchange  value  so  that  the  whole  supply  is  worth  less 
than  before,  such  a  consequence  cannot  conceivably  follow  a 
general  multiplication  of  products  such  as  is  conceded  to  result 
from  capitalistic  production.  Exchange  value,  as  has  been  so 
often  pointed  out,  is  the  ratio  of  exchange  between  goods. 
Multiplying  good  A  or  good  B  may  change  the  ratio  as  re- 
gards either  so  that  the  increased  supply  is  worth  less,  rather 
than  more,  than  before,  but  multiplying  all  goods  cannot  pos- 
sibly change  the  ratio  so  as  to  make  the  larger  supply  of  goods 
worth  less  than  was  the  smaller  supply  before.  The  inference 
that  the  aggregate  price  to  be  distributed  will  increase  as  the 
aggregate  supply  of  goods  increases,  or  that  capital  goods  are 
productive  in  the  sense  that  through  their  use  a  larger  sum  of 
value  is  created,  appears  therefore  to  be  abundantly  justified. 

Armed  with  the  knowledge  that  capital  goods  are  productive,  Exchange 
entrepreneurs  try  to  apportion  the  supply  of  capital  over  the  ^uctiv^t„ 
industrial  field  so  that  the  largest  return  will  be  realised.     The  Theories 
comparisons  which  this  leads  them  to  make  between  dififerent  nien'tarv 
capital  goods  and  between  capital  goods  and  workmen  have  al-  "ot  Con- 
ready  been  described,  as  has  the  tendency  which  results  from         ic  o  y 
these  comparisons  for  the  rate  of  interest  to  correspond  to  the 
product  economically  ascribable  to  units  of  capital  as  contrasted 
with  units  of  labour.     From  the  side  of  borrowers  or  entre- 
preneurs, therefore,  the  productivity  theory  of  interest  is  as 
valid  as  is  the  exchange  theory  from  the  side  of  lenders  or 
capitalists.    There  is  no  real  opposition  between  them.    Rather 
either  to  be  complete  must  be  supplemented  by  the  other,  as  will 
appear  when  we  come  to  the  discussion  of  the  last  phase  of  the 
productivity  theory,  that  is,  the  causes  which  control  the  sup- 
plies of  workmen  and  of  capital  goods,  and  which  by  so  doing 
determine  the  shares  of  the  product  assigned  to  them  respect- 
ively, at  the  margin  of  indifference  where  they  come  into  com- 
parison. 


28o  Value,  Price,  and  Distribution 


The 
Wages- 
fund 
Theory 


Con- 
clusions 
Drawn 
from  the 
Wages- 
fund 
Theory 


§  159.  Another  theory  in  apparent  conflict  with  that  which 
has  been  defended  in  these  pages  is  the  so-called  wages-fund 
theory,  which  at  one  time  enjoyed  great  vogue  in  English  eco- 
nomic literature.  The  theory  can  best  be  stated  in  the  lan- 
guage of  one  of  the  leading  works  on  political  economy  pub- 
lished about  the  middle  of  the  last  centur\',  that  of  John  Stuart 
Mill.  It  should  be  said  that  Mill  himself  abandoned  the  theory 
before  his  death,  but  without  revising  it  out  of  his  Political 
Economy.  In  his  chapter,  "  Of  Wages,"  Mill  states  that 
"  wages,  then,  depend  upon  the  demand  and  supply  of  labour; 
or,  as  it  is  often  expressed,  on  the  proportion  between  popula- 
tion and  capital.  .  .  There  is  unfortunately  no  mode  of  express- 
ing by  one  familiar  term  the  aggregate  of  what  may  be  called 
the  wages  fund  of  a  country ;  and  as  the  wages  of  productive 
labour  form  nearly  the  whole  of  that  fund,  it  is  usual  to  over- 
look the  smaller  and  less  important  part,  and  to  say  that  wages 
depend  on  population  and  capital.  .  .  With  these  limitations 
of  the  terms,  wages  not  only  depend  upon  the  relative  amount 
of  capital  and  population,  but  cannot  be  affected  by  anything 
else.  Wages  (meaning,  of  course,  the  general  rate)  cannot  rise 
but  by  an  increase  of  the  aggregate  funds  employed  in  hiring 
labourers,  or  in  a  diminution  of  the  number  of  competitors  for 
hire ;  nor  fall,  except  either  by  a  diminution  of  the  funds  de- 
voted to  paying  labour,  or  by  an  increase  in  the  number  of 
labourers  to  be  paid." 

In  the  guarded  way  in  which  the  theory  is  here  presented  no 
particular  objection  can  be  raised  to  it,  since  it  amounts  merely 
to  saying  that  wages  are  for  the  most  part  paid  out  of  capital, 
that  wages  in  the  aggregate  cannot  exceed  that  part  of  capital 
assigned  to  wages  or  the  wages  fund,  and  that,  consequently, 
the  average  rate  of  wages  depends  upon  the  proportion  be- 
tween the  wages  fund  and  the  wage-earning  population.  That 
real  wages  are,  literally  speaking,  withdrawn  from  the  stocks 
or  capital  of  retail  dealers  and  in  this  sense  "  paid  out  of  capi- 
tal "  was  shown  in  Chapter  IX.,  Section  89.  That  wages  in  the 
aggregate  cannot  exceed  the  aggregate  fund  of  goods  consti- 
tuting wages  is  self-evident.  Equally  incontestable  is  the 
method  proposed  for  calculating  average  wages.  Unfortu- 
nately advocates  of  the  wages-fund  theory  rarely  contented 


Criticism  of  the  Theory  281 

themselves  with  these  conservative  statements.  They  pre- 
,scnted  the  theory  as  a  law  of  wages  and  assumed  a  rigidity  in 
the  wages  fund  that  would  justify  the  most  extreme  conclu- 
sions. Thus  many  of  them  opposed  strikes  and  other  efforts 
on  the  part  of  particular  groups  of  workmen  to  raise  their 
wages  on  the  ground  that  their  higher  wages,  if  they  did  secure 
them,  would  leave  a  smaller  wages  fund  to  be  divided  among 
other  workmen  and  would  therefore  be  entirely  offset  by  lower 
wages  for  other  groups.  In  the  same  way  they  tended  to 
exaggerate  the  dependence  of  workmen  upon  capitalists  and  to 
represent  the  latter  as  the  greatest  benefactors  of  the  race,  since 
upon  their  self-restraint  the  size  of  the  all-important  wages  fund 
depended.  Any  measures  calculated  to  check  ever  so  little  the 
accumulation  of  capital  were  vigorously  opposed  on  the  ground 
that  they  menaced  the  welfare  of  the  whole  labouring  popula- 
tion. These  and  other  quite  unwarranted  conclusions  have 
stamped  the  wages-fund  theory  as  one  of  the  most  pernicious 
errors  ever  accredited  by  reputable  economists. 

As  suggested,  the  great  fault  with  the  wages-fund  theory  as  Criticism 
a  law  of  wages  is  its  assumption  that  the  wages  fund  is  rigid  ^J'^^^ 
and  predetermined.  At  the  time  that  this  idea  was  advanced 
by  English  economists  there  was  but  a  limited  importation 
of  food  and  the  other  goods  consumed  by  the  labouring  popu- 
lation of  England.  It  followed  that,  after  the  crops  were 
harvested,  the  amount  of  subsistence  upon  which  the  whole 
population  would  have  to  depend  during  the  ensuing  year 
was  practically  determined.  By  thinking  of  wages  in  terms 
of  the  staple  article  of  diet  of  English  workmen  of  the  period, 
wheat,  and  ignoring  the  fact  that  the  wheat  supply  must 
feed  others  as  well  as  wage-earners,  economists  succeeded  in 
persuading  themselves  of  the  existence  of  a  rigid  and  prede- 
termined wages  fund.  The  assumption  was  not  justified  even 
when  England  imported  no  food  from  abroad,  because,  on  the 
one  hand,  wages,  then,  as  now,  included  a  good  deal  more  than 
food,  and  on  the  other  it  was  not  the  subsistence  of  workmen, 
only,  that  was  predetermined,  but  that  of  the  whole  population. 
The  part  of  the  total  food  supply  which  should  go  to  wage- 
receivers  was  never  fixed  in  advance.  It  might  be  increased 
or  decreased  at  the  expense  of  the  parts  assigned  to  other 


282  Value,  Price,  and  Distribution 


Other 
Objections 
and 
Conclusion 


classes.  Hence  it  was  quite  unwarranted  to  argue  even  in 
reference  to  food  that  a  strike  could  not  improve  the  condition 
of  one  group  of  workmen  except  at  the  expense  of  some  otlier. 
But  if  the  belief  that  the  wages  fund  was  rigid  and  prede- 
termined was  not  defensible  in  England  during  the  second 
quarter  of  the  last  century,  it  is  still  less  defensible  for  com- 
mercial countries  of  the  present  day.  At  the  present  time  the 
principal  articles  used  for  food  are  produced  for  the  world 
market.  No  country  is  limited  to  its  own  products,  and  coun- 
tries like  the  United  States  which  produce  not  only  most  of 
their  own  food  articles,  but  also  for  export,  have  a  large  re- 
serve on  which  they  may  draw  at  will.  Moreover,  wages  in  the 
aggregate  consist  to  a  less  extent  than  ever  before  of  mere  sub- 
sistence, and  miost  of  the  articles  other  than  food  which  work- 
men consume  are  produced  continuously  and  admit  of  increase 
or  decrease  within  considerable  limits  in  response  to  the  vary- 
ing demands  of  the  market.  It  follows  that  the  wages  fund 
under  present  conditions  is  as  elastic  as  any  of  the  funds  with 
which  economics  has  to  deal,  and  no  law  of  wages  based  upon  it 
can  throw  much  light  on  the  causes  which  really  determine 
wages.  As  was  shown  in  Chapter  IX.,  Section  96,  even  the  fact 
that  wages  are  for  the  most  part  paid  out  of  capital  loses  its 
significance  when  it  is  remembered  that  the  products  of  labour 
are  themselves  added  to  capital  and  that  the  tendency  is  for 
these  products  to  exactly  replace  what  is  withdrawn  and  con- 
sumed and  to  keep  the  fund  of  capital  intact.  The  true  in- 
fluence of  the  supply  of  capital  upon  the  rate  of  wages  is  found 
not  in  the  field  of  distribution,  but  in  that  of  production.  An 
increase  of  capital  tends  to  raise  wages  because  it  enhances  the 
importance  of  labour  as  a  factor  in  production.  Marginal 
workmen  are  enabled  by  such  a  change  to  produce  more  than 
they  did  before  and  this,  at  last  analysis,  is  the  reason  why 
they  earn  more. 


REFERENCES  FOR   COLLATERAL   READING 

*Bdhni-Ba'wer!c,  Capital  and  Interest,  Book  II.,  and  The  Positive 
Theory  of  Capital,  Books  V.  and  VI.;  *  Pier  son.  Principles  of  Eco- 
nomics, Part  I.,  Chap.  IV.;  Mill,  Principles  of  Political  Economy, 
Book  II.,  Chap.  XI.;  ^Taussig,  Wages  and  Capital,  Part  I.,  and 
Part  II.,  Chap.  XI. 


CHAPTER  XVI 
VALUE.   PRICE,   AND   DISTRIBUTION    {conchided) 

§  i6o.  We  come  now  to  the  last  stage  in  the  explanation  of  Ultimate 

wages  and  interest,  the  discussion  of  the  causes  that  control  the  ^^tf^mi- 
°  nants  ot 

growth  of  population  and  of  capital,  and  by  so  doing  influence  Distri- 

the  location  of  the  margin  of  indifference  between  them.     It  ""^'°° 

will  be  well  to  preface  this  discussion  by  reciting  some  of  the 

facts  in  reference  to  the  actual  increase,  during  the  nineteenth 

century,   in   the  populations  of  the   leading  countries  of  the 

world. 

In  Chapter  II.,  Section   i6,  a  table  was  given  showing  the  Statistics 

growth  of  the  population  of  the  United  States  from  i7QO  to  ?,^     ,  ,. 

rT>,  ,    ,  ,  Population 

1900,     The  remarkable  rate  of  mcrease,  varymg  from  36.4  per 

cent,  in  the  decade  from  1800  to  1810  to  20.7  per  cent,  from 
1890  to  1900,  is,  of  course,  abnormal  in  the  sense  that  it  was 
due  in  part  to  immigration.  During  the  same  period  the  popu- 
lations of  European  countries  were  also  increasing,  but  at  a 
much  slower  rate.  Instead  of  doubling  on  the  average  once 
every  twenty-five  years  as  did  the  population  of  the  United 
States  from  1790  to  1890,  the  population  of  Europe  but  little 
more  than  doubled  during  the  whole  period.*  The  following 
table  gives  in  round  numbers  the  populations  of  the  seven  prin- 
cipal countries  of  Europe  in  1801  and  1891  with  the  percent- 
ages of  increase  :t 

Growth  of  Population  in  Europe,  i8oi-i8gi 

(000^000  omitted)  Increase 

1801  iSgi  Per  Cent. 

Russia  in  Europe,         ....  40.0  93.7  134 

Germany, 25.0  49  4  98 

Austria-Hungary,         ....  25.0  41.3  65 

France, 26.8  38.2  43 

United  Kingdom,         ....  16.3  37.9  133 

Italy 17.5  30.2  73 

Spain, 6.0  17.2  1S7 

*  According  to   the    French  statistician,    Professor   Levasseur,    the 
increase  was  from  175.000,000  in  1801  to  357,000,000  in  iSgi. 
f  From  Levasseur,  La  Population  francaise.  III.,  Ciiap.  VI. 

2S3 


284 


Value,  Price,  and  Distribution 


Signifi- 
cance of 
these 
Statistics 


Birth. 
Death,  anJ 
Marriage 
Rates  of 
Principal 
Countries 


Comment 
on  the 
Table 


The  most  interesting  fact  brought  out  by  the  above  table  is 
the  varying  rate  at  which  the  populations  of  the  different  coun- 
tries grew  during  the  period  covered.  This  appears  even  more 
clearly  from  statistics  showing  the  rates  of  growth  since  1871. 
Thus  from  1871  to  1891  the  population  of  France  was  prac- 
tically stationary,  the  population  of  Germany  increased  21  per 
cent.,  and  the  population  of  England  and  Wales  over  27  per 
cent. 

The  source  of  these  variations  in  the  rates  at  which  the  popu- 
lations of  different  countries  grow  is  to  be  sought,  of  course, 
in  the  relation  between  their  birth  and  death  rates  and  between 
immigration  and  emigration.  For  our  present  purpose  we 
may  confine  attention  to  the  former,  since  immigration  has  no 
direct  effect  upon  the  population  of  the  world  as  a  whole,  how- 
ever much  it  may  affect  that  of  particular  countries. 

The  following  table  gives  the  average  birth,  death,  and  mar- 
riage rates*  of  the  principal  countries  of  the  world  for  which 
statistics  are  available  for  the  years  1871-1890: 


Birth,  Death,  and  Marriage  Rates,  iSji-iSgo  f 


Births  Deaths 

Austria,    .         .  .     38.6  30.6 

Germany,         .  .38.1  26.0 

Italy,         .         .  .     37-3  28. 6 

Holland,           .  .     35.2  22.6 

United  Kingdom,  .     32.6  19.9 

Denmark,         .  .     31.7  19.0 

Belgium,           .  .     31.0  21.4 

Norway,            .  .30.7  16.9 

Sweden,            .  .     29.8  17.6 

Switzerland,    .  .     29.4  22.1 

France,            .  .     24.6  22.8 


Excess  of  Births 
over  Deaths 
8.0 

12. 1 

8.7 
12.6 

12.7 
12.7 

9.6 

13.8 

12.2 

7-3 

1.8 


Marriages 
16.3 

16.4 

15-6 

151 

14.4 

15-2 
14.2 

13-7 
I3-I 
14- 7 
15.4 


The  above  table  emphasises  again  the  great  differences  that 
are  found  in  different  countries.  Austria,  Germany,  and  Italy 
show  the  highest  marriage  and  birth  rates,  but  high  death-rates 
in  the  first  and  last  put  them  near  the  bottom  of  the  list  as  re- 

*That  is,  the  number  who  are  born,  who  die,  and  who  are  married 
for  each  1000  of  the  population  per  annum. 

f  These  statistics  are   taken   ixom.^\3iyo-^ra\\.\i.  Statistics  and  Soci- 
ology, Book  I.,  Chaps.  V.,  VI.,  and  VII. 


The  Malthusian  Doctrine  of  Population    285 

gards  the  rates  at  which  their  populations  are  growing.  The 
countries  with  the  lowest  birth  rates,  France,  Switzerland,  and 
Sweden,  have  very  diverse  marriage  and  death  rates.  France 
combines  with  the  highest  marriage-rate  the  lowest  birth-rate, 
while  in  Sweden  the  relation  is  just  reversed,  the  lowest  mar- 
riage-rate resulting  in  the  highest  birth-rate.  Even  more  re- 
markable is  the  difference  in  the  rates  at  which*  the  populations 
of  these  two  countries  are  growing.  The  low  birth-rate  of 
France  is  accompanied  by  an  average  death-rate  which  pre- 
vents the  population  from  increasing  as  much  as  0.2  per  cent, 
a  year.  In  Sweden  on  the  other  hand  the  higher  birth-rate  is 
associated  with  a  very  low  death-rate  which  causes  the  coun- 
try to  stand  near  the  top  of  the  list  as  regards  the  rate  at  which 
its  population  is  growing.  Such  are  the  facts  in  reference  to 
the  growth  of  population  in  the  principal  countries  of  the 
world.  We  may  now  turn  to  the  theories  of  population  that 
have  been  advanced  by  economists  in  their  efforts  to  show  that 
these  facts  obey  definite  social  laws. 

S  161.  The  first  clearly  formulated  theory  in  regard  to  the  T^e 

,.  1-  ,  ,  i^iViT-T.     Malthusian 

growtn  of  population  was  that  advanced  by  the  Kev.    i .  K.  Doctrine  ol 

Malthus  in  his  Essay  on  the  Principle  of  Population  as  it  Population 
Affects  the  Future  Improvement  of  Society,  published  in  1798. 
Malthus's  argument  was  mathematical  in  form,  but  so  simple 
as  to  be  easily  followed.  He  advanced  as  too  obvious  to  re- 
quire demonstration  the  propositions  :  ( i )  "  that  food  is  neces- 
sary to  the  existence  of  man,"  and  (2)  "that  the  passion  be- 
tween the  sexes  is  necessary  and  will  remain  nearly  in  its 
present  state."  From  these  he  proceeded  on  the  basis  partly 
of  reasoning  and  partly  of  observation  to  the  conclusion  that 
while  food  tends  to  increase  only  by  addition  or  in  arith- 
metical ratio,  population  tends  to  increase  by  multiplication  or 
in  geometrical  ratio.  The  significance  of  this  contrast  he 
makes  clear  in  the  following  sentences :  "  Taking  the  popula- 
tion of  the  world  at  any  number,  a  thousand  millions,  for  in- 
stance, the  human  species  would  increase  every  twenty-five 
years  in  the  ratio  of  1,2,  4,  8,  16,  32,  64,  128,  256,  512.  etc., 
and  subsistence  as  i,  2,  3,  4,  5,  6.  7,  8,  9,  10,  etc.  In  two  cen- 
turies and  a  quarter  the  population  would  be  to  the  means  of 
subsistence  as  512  to  10;  in  three  centuries  as  4096  to  13;  and 


286 


Value,  Price,  and  Distribution 


Influence 

of  the 

Dectrine 

on 

Economic 

Thought 


in  two  thousand  years  the  difference  would  be  ahiiost  incal- 
culable, though  the  produce  in  that  time  would  have  increased 
to  an  immense  extent."  "  The  power  of  population  is,"  he 
concludes,  "  indefinitely  greater  than  the  power  in  the  earth  to 
produce  subsistence  for  man."  Population,  consequently, 
tends  ever  to  press  ahead  of  the  means  of  subsistence,  and  is 
only  restrained  from  so  doing  because  without  subsistence  men 
must  perish.  In  order  to  keep  population  within  the  limits 
fixed  by  a  slov/ly  increasing  food  supply,  nature  imposes 
checks  which  ]Malthus  thought,  at  first,  might  be  characterised 
either  as  "  vice  "  or  "  misery."  The  lower  animals,  he  saw, 
obey  the  instinct  to  propagate  without  thought  of  the  conse- 
quences, with  the  result  that  their  numbers  are  kept  down  by 
"  want  of  room  or  nourishment  "  or  by  their  "  becoming  the 
prey  of  others."  Man  is  more  prudent  and  may  deliberately 
restrain  his  impulse  to  beget  and  multiply  his  kind.  "  This 
restraint,"  Malthus  declared,  "  almost  necessarily,  though  not 
absolutely  so,  produces  vice."  But  even  with  its  vicious  at- 
tendants, this  last  restraint  is  all  too  weak,  he  thought,  to  keep 
population  within  the  necessary  bounds.  Through  an  excess 
of  births  the  food  supply  is  rendered  insufficient,  and  misery 
accompanying  death  through  starvation  and  disease  appears  as 
another  necessary  check  for  man  as  for  the  lower  animals. 
Malthus's  general  conclusion  was  that  vice  and  misery  result 
inevitably  from  the  lack  of  harmony  between  man's  impulse  to 
beget  and  multiply  and  nature's  power  to  produce  food,  and  he 
justified  these  evils  as  the  divinely  selected  means  for  quicken- 
ing intelligence  and  soul  in  men  who  might  otherwise  have  no 
stimulus  to  improvement. 

More  mature  deliberation,  stimulated  no  doubt  by  the  bitter 
attacks  which  the  publication  of  his  opinions  excited,  induced 
Malthus  to  modify  his  argument  in  the  second  edition  of  his 
Essay  (1803).  He  here  recognises  that  voluntary  restraint 
not  only  need  not,  but  often  does  not  necessitate  vice,  and  that 
it  may  alone  prove  an  adequate  check  on  population.  By  this 
qualification  the  Malthusian  theory  was  changed  from  a  pessi- 
mistic denial  of  the  perfectibility  of  man  to  a  reasoned  appeal 
to  men  to  substitute  "  moral  restraint "  as  a  check  on  popula- 
tion for  the  vice  and  misery  which  Malthus  still  deemed  the 


Criticism  of  the  Doctrine  287 

chief  means  of  holding^  the  balance  between  it  and  the  food 
supply.  Notwithslandinj:^:  these  admissions,  Malthus  himself 
and  many  of  the  leading  English  economists  who  followed  him, 
such  as  Ricardo  and  John  Stuart  Mill,  continued  to  think  of 
population  as  tending  constantly  to  get  ahead  of  the  food 
supply. 

The  most  fundamental  criticism  to  be  urged  against  Mai-  Criticism 
thus's  reasoning  is  that  he  contrasts  a  purely  hypothetical  Doctrine 
man  with  an  equally  hypothetical  nature.  Speculating  as 
to  the  rate  at  which  population  would  increase  if  un- 
checked is  idle  when,  as  a  matter  of  fact,  men  arc  never 
unchecked  in  their  begetting  and  rearing  of  children.  Even 
the  lowest  savage  appreciates  the  tremendous  consequences 
of  the  sexual  function  and  is  to  some  extent  restrained  by  this 
knowledge.  In  the  same  way  prophecies  in  regard  to  the 
utmost  possible  increase  in  the  earth's  output  (5f  food  can 
furnish  no  solid  basis  for  scientific  reasoning,  because  man 
never  has  and  probably  never  will  tax  nature  to  her  utmost. 
With  all  its  suggestiveness,  therefore,  Malthus's  method  of 
approaching  the  question  predisposed  him  to  arrive  at  erro- 
neous conclusions.  He  avoided  these  in  large  measure  in  the 
second  and  later  editions  of  his  Essay,  but  only  by  giving  such 
a  different  turn  to  his  argument  as  to  deprive  it  of  much  of 
its  original  significance. 

§  162.  Economists  are  still  divided  in  their  opinions  in  regard  Premisses 
to  the  relative  importance  of  the  different  influences  that  con-  I? 
trol  the  growth  of  population.     In  general  they  may  be  sepa-  about 
rated  into  three  groups,  according  to  whether  they  emphasise     op^^^^ion 
the  physiological,  the  social,  or  the  economic  factors  which 
enter  into  the  problem.     Upon  two  points  all  are  in  substantial 
agreement:  (i)  Illegitimate  births  constitute  such  a  small  pro- 
portion of  all  births  in  modern  communities  that  no  serious 
error  is  involved  in  assuming  that  a  more  or  less  formal  union 
precedes  the  begetting  of  children.  (2)  The  age  of  the  wife  at 
marriage  has  great  influence  on  the  number  of  children  to  a 
family,  the  general  rule  being  that  the  older  the  wife  the  fewer 
the   children.      These   two   propositions    may   be   accepted   as 
premisses  in  all  reasoning  in  reference  to  the  population  ques- 
tion. 


288 


Value,  Price,  and  Distribution 


The  Physi- 
ological 
Check 


The 

Influence 
of  Social 
Customs 


The  economists  who  make  prominent  physiological  con- 
siderations in  their  discussions  of  population  try  to  establish 
the  general  law  that  the  reproductive  capacity  of  animals 
stands  in  a  definite  relation  to  the  complexity  of  their  nervous 
organisations.  The  more  highly  evolved  the  organism,  the 
smaller,  it  is  contended,  is  the  number  of  the  offspring.  Even 
if  this  theory  be  true  in  its  application  to  difi:erent  orders  of 
animals,  including  man,  it  remains  open  to  question  whether 
the  subtle  changes  which  are  still  going  on  in  man's  nerv^ous 
organisation  can  be  shown  to  influence  appreciably  his  repro- 
ductive capacity.  Reasoning  from  analogy  that  because  men 
beget  fewer  offspring  than  lower  orders  of  animals,  highly 
developed  men  and  women  must  be  less  fruitful  than  those 
who  are  less  developed  is  suggestive,  but  not  conclusive.  On 
the  other  hand,  statistics  of  population  have  not  yet  been  per- 
fected to  a  point  that  makes  a  test  of  the  theory  in  the  light  of 
the  facts  of  experience  possible.  If  the  theory  prove  to  be 
well-founded  it  may  help  to  set  at  rest  the  fears  of  modern 
Malthusians  who  continue  to  dread  the  curse  of  over-popula- 
tion. It  must  still  be  regarded,  however,  as  an  interesting 
hypothesis  rather  than  as  an  established  principle. 

That  the  growth  of  population  is  controlled  by  social  customs 
and  standards  was  recognised  quite  clearly  by  Malthus  himself. 
Among  primitive  peoples  customs  like  that  of  exposing  female 
children  at  their  birth  have  a  direct  influence  on  the  growth 
of  population  and  may  serve  as  substitutes  for  all  other  checks. 


Marriasfe   customs   also   have   the 


greatest 


influence.     Other 


things  being  equal,  polygamous  marriages  are  favourable  to  a 
rapid  growth  of  population.  This  was  clearly  recognised  by 
the  founder  of  the  Mormon  Church  and  was  a  prominent  mo- 
tive for  the  inclusion  of  pol3^gamy  in  that  religion,  notwith- 
standing the  clear  prohibition  of  the  practice  in  the  Book  of 
Mormon  itself.  The  extension  of  the  practice  of  monogamy 
tends  to  restrain  the  growth  of  population  and  has  not  been 
without  influence  in  preserving  European  countries  from  the 
periods  of  famine  that  are  still  not  vmusual  in  the  Far  East. 
Other  customs,  such  as  that  requiring  that  the  husband  shall 
be  able  to  provide  a  house  for  his  wife,  or  that  the  wife  shall 
have  made  with  her  own  hands  an  elaborate  trousseau  before 


Influence  of  the  Standard  of  Living"     289 

marriage,  serve  to  postpone  the  period  of  marriage  and  indi- 
rectly to  check  the  growth  of  population.  As  the  customs  and 
usages  of  different  peoples  are  all  moulded  to  one  common 
standard  through  international  intercourse,  the  special  re- 
straints on  population  which  once  acted  in  particular  localities 
will  lose  their  force.  Public  opinion  still  controls  in  large 
measure  the  conduct  of  individuals  in  their  marriage  relations, 
but  its  prescriptions  arc  based  to  an  ever  increasing  extent  on 
economic  considerations,  and  this  brings  us  to  the  third  factor 
controlling  population. 

§  163.  The  most  obvious  and  certain  economic  check  upon  The 
population  is  that  emphasised  by  all  writers  since  the  subject  (^h^ck 
began  to  attract  attention,  namely  the  need  common  to  all  men 
for  food,  clothing,  and  shelter  as  conditions  to  continued  exist- 
ence. Population  is  checked  by  starvation,  disease,  and  death 
as  soon  as  the  number  of  the  people  reduces  the  earnings  of  the 
lowest  grade  of  wage-earners  below  what  is  needed  to  main- 
tain and  rear  an  average  family.  This  "  positive  check  "  is 
unfortunately  of  more  than  historical  interest.  Every  coun- 
try has  its  "  submerged  tenth  "  of  unfortunates  who  suffer 
habitually  from  under-nutrition  and  resulting  disease  and 
death.  As  already  stated  the  members  of  this  class  are  con- 
stantly changing.  Those  who  neither  die,  nor  win  their  way 
back  to  the  classes  from  which  they  descended,  are  forced  in 
time  to  apply  for  institutional  relief  and  to  enter  the  still  lower 
class  of  avowed  social  dependents.  It  follows  that  the  normal 
tendency  of  the  class  is  towards  self-extinction.  It  is  perpetu- 
ated, if  not  actually  added  to.  in  countries  like  the  United 
States,  by  the  steady  stream  of  recruits  that  descends  to  it  from 
the  higher  industrial  classes. 

Actual  starvation  confronts  more  rarely  those  belonging  to  Tlie 
the  class  of  manual  workers  (Class- 4  in  the  classification  sug-  ^'f  tfJe"*^® 
gested  in  Chapter  XIII.,  Section  138),  but  for  them  also  under-  Standard 
nutrition  is  a  possibility  which  prolonged  illness  or  inability  to  °      '^*°^ 
obtain  employment  may  at  any  time  change  into  a  reality.    The 
narrow  margin  which  their  usual  earnings  provide  above  the 
bare  necessaries  of  life,  coupled  with  their  lack  of  thrift  and 
prudence,  makes  them  especially  liable,  when  some  temporary 
calamity  reduces  their  incomes,  to  sink  permanently  below  the 


290 


Value,  Price,  and  Distribution 


A 

Stationary 
Population 


Conditions 
Necessary 
to  a  Low 
Birth-rate 


line  of  self-support  and  self-respect.  At  the  same  time,  for 
this  class  as  a  whole  it  is  not  disease  and  death,  but  sacrifices 
induced  by  the  desire  to  maintain  the  "  standard  of  living,"  that 
act  as  the  principal  check  upon  the  growth  of  population.  As 
this  check  acts  in  about  the  same  way,  although  not  in  the  same 
degree,  on  all  classes  above  the  very  lowest,  its  influence  may 
be  discussed  in  o-eneral  terms. 

§  164.  The  population  of  a  country  like  the  United  States  is 
divided  up  into  hundreds  of  different  classes,  each  distinguished 
by  special  industrial  qualities  and  having  a  different  earning 
capacity  from  the  others.  The  general  law  applying  to  the 
earnings  of  all  classes  is  that  an  increase  in  the  number  of  per- 
sons competing  for  any  particular  grade  of  work  tends  to  lower 
the  wages  paid  for  that  kind  of  work.  The  tendency  may  be 
counteracted  by  an  increased  demand  for  the  grade  of  work 
concerned,  or  by  similar  increases  in  the  supplies  of  workmen 
and  of  capital  goods  all  along  the  line  unaccompanied  by  any 
lowering  of  the  margin  of  cultivation,  but  in  the  absence  of 
these  changes  it  is  always  to  be  reckoned  with.  As  explained 
in  Chapter  XIII.,  Section  138,  different  classes  are  more  or  less 
clearly  marked  off  from  each  other  and  it  is  a  usual  thing  for 
children  to  fit  themselves  for  the  grade  of  work  done  by 
their  parents.  In  a  stationary  society  the  number  of  work- 
men in  each  grade  would  need  to  be  kept  constant  if  a  change  in 
wages  was  to  be  avoided.  Children  in  each  grade  would  need, 
on  the  average,  to  just  replace  those  withdrawn  by  death,  or 
the  birth-rate  for  each  grade  would  need  to  just  equal  the 
death-rate,  if  there  was  to  be  no  reduction  in  the  standard  of 
comfort.  Although  few  modern  societies  are  stationary,  it 
will  be  useful  to  note  just  what  this  condition  of  affairs  in- 
volves as  regards  the  habits  of  a  population  before  passing  to 
a  discussion  of  the  limitations  which  are  active  in  a  progressive 
society. 

The  standard  of  living  has  been  defined  as  the  "  mode  of 
activity  and  scale  of  comfort  which  a  person  has  come  to  re- 
gard as  indispensable  to  his  happiness,  and  to  secure  and  retain 
which  he  is  willing  to  make  any  reasonable  sacrifice."  From 
the  point  of  view  of  the  growth  of  population  the  sacrifice 
which  the  maintenance  of  the  standard  of  living  may  entail  is 


A  Stationary  Population  291 

the  postponement  of  marriage.  In  the  assumed  situation  this 
sacrifice  would  have  to  be  incurred  to  the  extent  necessary  to 
prevent  population  from  increasing  at  all.  Consider  how  this 
might  be  accomplished  for  any  given  class  in  the  population. 
As  children  attain  maturity  and  begin  to  seek  for  employment 
they  will  find  the  number  of  desirable  positions  limited  and  the 
competition  for  them  severe.  This  discovery  will  afifect  dif- 
ferent ones  quite  differently.  Some  in  every  class  will  accept 
the  best  positions  they  can  get,  adjust  themselves  to  the  limited 
incomes  these  positions  afford,  and  marry  early  without  much 
regard  to  consequences.  They  are  likely  to  have  larger  fami- 
lies than  they  can  easily  provide  for  and  may  be  so  discouraged 
in  the  struggle  that  they  will  fail  to  maintain  their  standards  of 
living  or  to  give  their  children  as  good  starts  in  life  as  they 
themselves  enjoyed.  Or,  instead  of  being  discouraged  by  the 
difficulties  they  encounter,  they  may  only  be  inspired  to  put 
forth  greater  efforts.  Marriage  is  the  spur  to  lagging  ambi- 
tion which  many  young  men  require,  and  instead  of  preventing" 
them  from  attaining  the  best  and  highest  of  which  they  are 
capable  it  proves  often  the  ver}^  means  of  helping  them  to  such 
attainment.  Such  men  raise  their  standards  of  living  rather 
than  lower  them  as  their  responsibilities  multiply,  and  conceive 
plans  for  their  children  that  they  would  have  been  incapable 
of  formulating  for  themselves.  Besides  those  who  marry  early, 
there  are  others  with  greater  prudence  who  refuse  to  assume 
the  responsibilities  of  married  life  until  they  are  well  estab- 
lished. By  the  time  such  men  feel  able  to  marry  their  inclina- 
tion to  do  so  may  have  passed,  or  if  they  do  marry,  their  fam- 
ilies are  likely  to  be  small.  Allowing  for  men  and  women  who 
do  not  marry  at  all,  for  childless  marriages,  and  for  infant 
mortality,  which  is  high  in  even  the  most  advanced  communi- 
ties, we  may  conclude  that  the  prudence  and  forethought 
of  only  a  part  of  the  members  of  each  class  will  keep  a  popu- 
lation stationary,  even  though  a  large  number  are  quite 
reckless  in  their  marriage  relations.*  Great  prudence  on  the 
part  of  some  will  serve  to  offset  great  recklessness  on  the  part 
of  others. 

*The  population  of  France  is  practically  stationary,  although  three 
children  to  a  family  is  the  average  in  that  country. 


292 


Value,  Price,  and  Distribution 


Causal 

Relation 

between 

the 

Standard 

of  Living 

and  Wages 

in  the 

United 

btates 


In  a  progressive  society  like  the  United  States  the  conditions 
differ  from  those  just  described  only  to  the  extent  that  prog- 
ress permits  an  increase  in  population  without  any  lowering  of 
the  standards  of  living.  If  the  rate  of  progress  is  rapid  enough 
standards  may  be  maintained  and  even  advanced  at  the  same 
time  that  population  is  growing  as  rapidly  as  early  marriages 
and  large  families  permit.  Under  such  circumstances  the 
power  of  resistance  which  the  standard  of  living  offers  is  not 
brought  into  play  at  all,  and  it  is  more  accurate  to  speak  of 
wages  as  determining  the  rising  standard  than  of  the  standard 
as  determining  the  rising  wages.  Few  countries  are  so  favour- 
ably situated  as  this.  Even  in  the  United  States,  especially  as 
regards  the  higher  industrial  classes,  population  has  been  held 
in  check  by  the  standard  of  living.  In  periods  of  great  pros- 
perity the  tendency  is  for  earnings  to  increase  and  for  stand- 
ards to  rise.  The  causal  relation  is  from  wages  to  the  standard. 
In  times  of  depression  the  higher  standard  is  maintained  and 
serves  to  prevent  the  fall  in  wages  that  would  inevitably  follow 
if  marriages  continued  to  be  as  numerous  as  they  were  be- 
fore. The  causal  relation  is  now  from  the  standard  to 
wages. 
Population  Economists  have  been  too  much  inclined  to  ignore  the  psy- 
Growatthe    chological  results  of  marriage  in  their  discussions  of  the  popu- 

Top,  not  at    lation  question.   In  a  progressive  communitv,the  fact  to  be  dep- 
the  Bottom  ^  .  \     ^       .  ,,  •  1  .- 

recated  is  not  so  much  a  rapidly  growing  population,  as  a  pop- 
ulation which  is  increasing  more  rapidly  at  the  bottom  than  at 
the  top.  Early  marriages  and  large  families  for  manual  workers 
who  are  incapable  of  achieving  or  even  aspiring  to  any  higher 
standard  of  living  than  that  of  their  class  are  socially  harmful. 
What  is  needed  by  this  class  is  a  wider  ambition,  coupled  with 
the  prudence  necessary  to  the  attainment  of  the  objects  which 
it  suggests.  The  higher  economic  classes,  on  the  other  hand, 
suffer  not  from  lack  of  prudence,  but  from  a  lack  of  sane  and 
wholesome  desires.  Their  standards  of  living  are  largely  arti- 
ficial and  for  them  early  marriages  and  large  families  are  more 
likely  than  not  to  prove  a  benefit  by  stimulating  and  giving  a 
wiser  direction  to  ambition.  Even  should  the  result  be  a  low- 
ering of  the  earnings  of  the  class  to  which  such  individuals  be- 
long, the  consequence,  socially  considered,  may  not  be  disad- 


Immigration  and  Emigration         293 

vantageous,  if  it  does  not  at  the  same  time  lower  the  earn- 
ings of  lower  classes.  An  equalisation  of  earnings  through 
a  multiplication  of  professional  and  skilled  workmen 
and  a  reduction  of  manual  workers  would  be  highly  de- 
sirable. 

A  complicating  circumstance  that  makes  it  difficult,  if  not  The 
impossible,  to  form  any  conclusion  in  reference  to  the  power  of  ^"""•^"ce 
resistance  which  the  standard  of  living  of  the  manual  labour-  juration  and 
ing  class  opposes  to  falling  wages,  is  emigration  and  immigra-  '  ^'graiion 
tion.  For  example,  Germany's  population  continues  to  in- 
crease at  about  the  same  rate  decade  after  decade,  and  the  sur- 
plus is  disposed  of  by  emigration  without  any  lowering  of  the 
earnings  of  the  workmen  who  remain  in  the  Fatherland.  It 
can  only  be  guessed  whether  population  would  be  checked  by 
the  standard  of  living,  so  that  earnings  could  be  maintained, 
should  some  circumstance  close  to  German  emigrants  the  coun- 
tries to  w'hich  they  are  now  welcomed.  In  a  reverse  way  im- 
migration prevents  any  gauging  of  the  power  of  resistance  of 
the  standard  of  living  of  America's  manual  labouring  class. 
The  steady  stream  of  immigrants  with  lower  standards  from 
Europe  is  a  demoralising  influence,  but  the  latter  have  thus  far 
been  assimilated  without  any  serious  decline  in  earnings.  If 
immigration  were  to  cease  and  a  long  period  of  depression 
were  to  threaten  a  reduction  in  the  wages  of  the  labouring 
population,  it  is  quite  problematical  whether  the  standard  of 
living  would  serve  to  check  marriages  and  births  to  the  extent 
that  woiild  be  necessary  to  prevent  such  a  reduction. 

In  the  opinion  of  most  contemporary  economists  the  stand-  The 
ard  of  living  is  an  efifective  means  of  control  over  the  growth  Population 
of   populaliiMi,    and    the    tendency    among   progressive    coun-  Controlled 
tries    generally    is    for    standards    to    rise    and    to    insure    to  standards 
the    rank    and    file    of   the   population   ever    larger   command  of  Living 
over  the   material  conditions  necessary  to  happy  homes  and 
happy  lives.     This  opinion  must  be  accepted,  if  at  all,  by  refer- 
ence to  general  considerations  and  to  the  undoubted  fact  that 
the  real  earnings  of  the  manual  labouring  class  are  larger  than 
at  any   previous  stage  in  the  world's  history.     The  primary 
cause  of  their  improvement  has  been  the  improved  methods  of 
production  that  have  been  referred  to  frequently  in  these  pages. 


The 
Growth 
of  Capital 


The 

Growth  of 
Wealth  in 
the  United 
Kingdom 


294  Value,  Price,  and  Distribution 

Rising-  standards  of  living  have  doubtless  been  a  secondary 
cause,  since  it  is  highly  probable  that  but  for  them  population 
would  have  kept  pace  with  the  new  methods  and  prevented  the 
earning  capacity  of  the  bare-handed  workman  from  increasing. 
Before  attempting  a  summary  statement  in  reference  to  the 
influences  controlling  the  growth  of  population  and  through  it 
wages,  it  will  be  well  to  consider  how  the  growth  of  capital  or 
wealth  is  controlled. 

§  165.  As  in  discussing  the  growth  of  population,  so  in  dis- 
cussing the  growth  of  capital,  we  will  begin  with  a  brief  study 
of  the  facts  and  consider  subsequently  theories  touching  the 
causes  controlling  capital  accumulation.  Unfortunately  statis- 
tics of  capital,  as  distinct  from  statistics  of  wealth  of  all  kinds, 
are  rarely  available,  so  the  economist  is  forced  to  content  him- 
self with  rough  estimates.  In  all  progressive  countries  capital 
appears  to  be  growing  at  a  more  rapid  rate  than  population. 
The  following  estimates  referring  to  the  United  Kingdom  and 
the  United  States  throw  some  light  on  the  rate  of  accumu- 
lation. 

According  to  the  elaborate  calculations  of  Sir  Robert  Gififen, 
explained  in  his  work  on  The  Growth  of  Capital,  the  wealth 
and  population  of  the  United  Kingdom  increased  as  follows 
from  1845  to  1885: 


1845 

Population 
(Millions) 
28 

Wealth 

(Million  £) 

4,000 

Wealth 
Per  Capita. 
00 
143 

1865 

30 

6,000 

200 

1875 

33 

8,500 

260 

1885 

37 

10,000 

270 

In  the 

United 

States 


The  increase  in  wealth  from  1865  to  1875  was  thus  40  per 
cent,  and  from  1875  to  1885,  17.4  per  cent.  The  lower  rate  of 
increase  between  the  latter  years  is  accounted  for  in  part,  if  not 
wholly,  by  the  decline  in  prices  during  that  period. 

The  statistics  of  wealth  included  in  the  United  States  census 
reports  are  believed  to  be  quite  untrustworthy  as  regards  the 
gross  totals  returned,  but  may  be  cited  as  a  basis  for  a  com- 
parison of  particular  items.  The  following  schedule  gives  the 
estimated  total  wealth  of  the  country  for  the  year  1890: 


The  Growth  of  Capital  295 

Wealth  of  the  United  States  in  i8go 
{$/  ,000,000,000) 

Real  estate  with  improvements, 39.5 

Live  stock  on  farms,  farm  implements  and  machinery,      .     2 
Mines  and  quarries,  including  products  on  hand,        .         .1 

Gold  and  silver  coin  and  bullion, i 

Machinery  of  mills,  and  products  on  hand,  .         .         .3 

Railroads  and  equipment 8 

Telegraplis,  telephones,  shipping  canals  and  equipment,     o 
Miscellaneous, 7 


Total 65.1 

As  the  population  of  the  country  in  that  year  was  some  62,- 
600,000,  the  estimated  per  capita  wealth  was  something  over 
$1000  or  somewhat  less  than  the  estimated  per  capita  wealth  of 
the  United  Kingdom  in  1885. 

The  growth  of  wealth  is  indicated  in  a  very  rough  way  by  Growth  of 
the  following  statistics  showing  the  increase,  for  each  decade  ^,f!|\^!^„(j 
since  1850,  of  the  value  of  all  farm  property  in  the  country  Manufac- 
and  of  the  capital  invested  in  manufactures.     The  last  item  is  ^"J'-^^j 
quite  untrustworthy  except  for  the  last  two  census  years : 


Capital 

Value  0 

f  All 

Invested  in 

Farm  Pro 

pertv 

Increase 

Manufactures 

Increase 

($ 

,000,000,000) 

Per  Cent. 

($1,000,000,000) 

Per  Cent 

1850 

4.0 

0.5 

i860 

8.0 

ICO 

I.O 

ICO 

1870 

8.9 

II 

2.1 

110 

IS80 

12.2 

37 

2.8 

33 

1890 

I6.I 

32 

6.5 

132 

1900 

20.4 

26 

9.8 

51 

From  these  figures  it  may  be  inferred  that  the  wealth  of  the 
country  increased  from  1890  to  1900  by  an  increment  some- 
where between  26  per  cent.,  the  estimated  increase  in  agri- 
culture, and  51  per  cent.,  the  estimated  increase  in  manufactur- 
ing. As  population  increased  during  the  decade  less  than  21 
per  cent.,  the  statement  that  capital  grew  more  rapidly  than 
population  appears  abundantly  justified. 

In  interpreting  these  and  other  statistics  of  wealth  and  capi-  Necessary 
tal  great  caution  is  necessary.     Where  such  statistics  have  been 
collected  by  the  inventory  method,  as  is  attempted  in  the  United 


296 


Value,  Price,  and  Distribution 


Present 

Preferred 

above 

Future 

Goods 


Reasons 
for  this 
Preference 


States,  important  items  are  sure  to  be  omitted  while  other  items 
are  sure  to  be  duphcated.  On  the  other  hand,  where  such 
figures  are  calculated  from  returns  as  to  incomes  from  dififerent 
sources,  as  were  Sir  Robert  GifTen's  figures,  errors  may  arise 
either  from  inaccuracies  in  the  incomes  reported  or  from  mis- 
takes in  the  method  by  which  the  amount  of  capital  giving 
rise  to  incomes  is  inferred  from  the  amount  of  incomes.  An- 
other difificulty  arises  when  it  is  attempted  to  infer  statistics  in 
reference  to  capital  from  statistics  of  general  wealth.  The  nor- 
mal effect  of  an  increase  in  capital  is  a  decline  in  the  rate  of 
interest,  but  this  serves  itself  to  increase  the  value  of  lands, 
monopolies,  and  other  sources  of  funded  incomes.  It  follows 
that  as  capital  increases  and  the  rate  of  interest  falls,  the  ap- 
parent increase  in  wealth  is  likely  to  be  much  greater  than  the 
actual  increase  in  economic  goods.  Still  another  source  of 
error  is  in  changes  in  the  prices  of  goods,  but  enough  has  been 
said  to  indicate  that  statistics  of  wealth  and  capital  must  be 
interpreted  with  greater  caution  than  any  other  statistics  with 
which  economics  deals.  We  have  now  to  consider  theories  as 
to  the  causes  which  control  the  accumulation  of  capital  or  the 
growth  of  wealth. 

§  166.  Since  capital  goods  owe  their  existence  primarily  to 
a  willingness  on  the  part  of  men  to  postpone  consumption  or  to 
save,  the  increase  of  such  goods  is  affected  by  everything  which 
influences  this  willingness.  What,  then,  are  the  inducements  to 
saving  and  what  the  opposing  motives  for  spending?  The 
latter  have  already  been  considered  in  Chapter  IV.,  Section  36. 
As  was  there  shown,  it  is  the  tendency  of  men  to  overestimate 
the  importance  of  the  present  in  comparing  it  with  the  future, 
and  this  leads  them  normally  to  prefer  present  command  over 
consumable  goods  to  future  command  over  goods  of  like  kind 
and  quantity,  present  satisfactions  to  similar  satisfactions  at 
some  future  date. 

Four  reasons  may  be  assigned  for  the  above  tendency :  First 
and  most  obvious  is  the  fact  that  provision  for  present  necessi- 
ties is  the  indispensable  condition  to  the  continuance  of  life. 
The  shipwrecked  mariner  who  has  provided  himself  with  sub- 
sistence for  one  week  has  no  choice  between  consuming  it  this 
week  or  next  month.     His  present  need  for  food  must  be  satis- 


The  Motives  to  Saving  297 

fied  and  must  loom  larger  in  his  consciousness  than  his  need  at 
some  future  time.  This  fact  prevents  men  from  saving  that 
portion  of  their  incomes  needed  for  present  necessities.  Sec- 
ondly, the  future  is  uncertain.  No  man  knows,  when  making 
provision  for  the  future,  that  he  will  live  to  enjoy  it.  This  was 
summed  up  in  pagan  philosophy  in  the  phrase,  "  eat,  drink,  and 
be  merry,  for  to-morrow  we  die."  The  Christian  religion  also 
emphasises  the  uncertainty  of  life  in  that  it  directs  men  to  take 
no  thought  for  the  morrow,  but  to  devote  their  days  to  pious 
works  and  the  preparation  of  the  spirit  for  the  immortal  life  to 
come.  Either  course  is  obviously  unfavourable  to  the  accumu- 
lation of  capital.  A  third  reason  is  found  in  man's  deficiency 
in  imagination.  Present  wants  are  actually  felt,  those  of  the 
future  are  only  imagined.  The  consequence  for  the  average 
man  is  an  underestimate  of  the  importance  of  future  satisfac- 
tions which  makes  him  unwilling  to  forego  present  pleasures 
on  their  account.  Finally,  a  fourth  reason  is  man's  lack  of 
resolution  or  will.  Many  who  have  the  most  vivid  imagina- 
tions are,  nevertheless,  proverbially  improvident.  This  is  be- 
cause they  have  not  the  strength  of  character  to  resist  the 
temptations  of  the  present  and  provide  in  advance  for  the 
needs  of  the  future  which  they  so  clearly  foresee. 

These  reasons  combined  predispose  the  average  man  to  spend. 
The  proportion  of  his  income  that  he  will  spend  depends  in 
a  measure  on  the  amount  of  that  income.  If  it  is  small,  most, 
if  not  all,  must  go  for  present  necessities.  The  poverty  of  the 
poor  is  an  almost  insurmountable  obstacle  to  their  ever  becom- 
ing rich.  Those  who  are  more  fortunately  situated  compare  in 
their  minds  present  comforts  and  provision  in  advance  for 
future  necessities,  or  present  luxuries  with  future  comforts. 
With  an  ample  income  even  the  most  improvident  person  is 
likely  to  make  some  provision  for  the  future.  More  prudent 
people  are  likely  to  save  something  though  their  incomes  be 
small. 

The    strongest  counter-motive  to    spending    is    the    desire  The 
to  provide  for  one's  self  antl  one's  family  after  old  age  has  ga^^iiTc^  '° 
come  and  earning  power  has  been  reduced  or  has  failed  al- 
together.   This  is  important  because  it  applies  to  nearly  every- 
one.    Its  practical  consequences  arc  reflected  in  the  vast  sums 


298  Value,  Price,  and  Distribution 

which  are  paid  each  year  in  progressive  countries  as  premiums 
to  hfe  insurance  companies.*  Some  of  these  payments  secure 
for  the  family  a  fixed  sum  upon  the  death  of  the  insured.  A 
more  common  form  of  policy  at  present,  however,  is  one  which 
calls  for  payment  of  the  principal  after  a  certain  number  of 
years,  even  though  death  has  not  occurred.  This  reflects 
clearly  the  general  appreciation  of  the  fact  that  old  age  means 
usually  diminished  earning  power.  Next  in  importance  to  the 
desire  to  provide  for  old  age  as  a  motive  to  saving  is  ambition 
to  command  social  esteem,  power,  and  influence.  That 
"  wealth  is  power  "  of  a  certain  kind  is  a  fact  universally  ap- 
preciated. Those  who  covet  power  at  the  present  day  are  very 
apt  to  seek  it  through  the  avenue  of  wealth  accumulation. 
Though  less  general  than  the  first  motive,  this  is  doubtless  the 
dominant  consideration  to  those  men  who  acquire  the  largest 
fortunes.  A  third  motive  to  saving  is  the  interest  which  may 
be  obtained  for  the  use  of  capital,  which  is  itself  traceable  to 
the  superior  efficiency  of  capitalistic  production.  Economists 
have  tended  to  exaggerate  this  motive  in  declaring  that  "  inter- 
est is  the  reward  of  saving."  It  is  certainly  not  true  that  in- 
terest is  the  only  reward  or  even  the  chief  reward  of  saving,  or 
that  the  greater  part  of  the  saving  which  now  occurs  would 
cease  if  the  interest  now  paid  for  the  use  of  capital  were  to  be 
withdrawn.  Interest  is  the  reward  of  saving,  however,  in  the 
sense  that  all  those  who  save  under  present  industrial  con- 
ditions may,  and  as  a  rule  do,  receive  interest  as  one  of  their 
compensations.  Furthermore,  to  some  of  those  who  save 
interest  is  the  reward  that  is  chiefly  considered,  and  the  rate 
of  interest  has  a  determining  influence  on  the  amount  of  in- 
come they  are  willing  to  save.  A  fourth  motive  to  the  accumu- 
lation of  capital  is  ambition  for  business  success.  Many  of 
the  men  who  succeed  best  in  business  in  the  United  States  seem 
devoid  of  other  ambition.  They  have  become  absorbed  in  the 
game  of  making  money  and  persist  in  it  because  it  interests 
them  more  than  anything  else,  though  they  have  no  very  clear 
idea  to  what  use  they  will  put  their  fortunes  after  they  are  ac- 
quired.    To  such  men  business  success  is  the  all-important  ob- 

*The  annual  incomes  of  such  companies  in  the  United  States, derived 
chiefly  from  premiums,  exceed  $500,000,000. 


Ultimate  Determinants  of  Distribution    299 

ject,  and  capital  is  accumulated  simply  because  it  is  a  necessary 
step  towards  the  attainment  of  the  goal. 

Comparing-  the  four  motives  inducing  men  to  spend  with  Progress 
those  inducing  them  to  save,  we  may  conclude  without  argu-  ensTl^se 
ment  that  progress  tends  to  strengthen  the  latter  and  to  weaken  Motives 
the  former.  The  pressure  of  current  needs,  the  uncertainty  of 
life,  lack  of  imagination,  and  wea"kness  of  will  are  all  becom.- 
ing  less  prominent  influences  shaping  the  conduct  of  the  aver- 
age man.  On  the  other  hand,  desire  to  provide  for  the  family, 
social  ambition,  willingness  to  postpone  consumption  for  the 
sake  of  interest,  and  ambition  for  business  success  seem  on  the 
increase.  These  changes  are  responsible  for  the  tendency  al- 
ready described  for  capital  goods  to  multiply  more  rapidly 
than  population,  for  the  operation  of  the  law  of  diminishing 
returns  as  regards  capital  as  a  whole,  and  for  the  declining  rate 
of  interest  so  marked  in  the  United  States  during  the  last  forty 
years.  Some  writers  go  so  far  as  to  prophesy  that  this  multi- 
plication of  capital  goods  will  continue  until  the  industrial 
world  has  all  of  the  capital  it  can  utilise  and  the  rate  of  inter- 
est on  safe  investments  has  been  lowered  to  nothing.  This 
possibility  is  considered  in  the  concluding  chapter  on  Economic 
Progress. 

§  167.  In  the  explanation  of  distribution  that  has  been  given.  The 
great  importance  has  been  ascribed  to  the  productiveness  of  Determi^ 
labour  and  capital  in  marginal  industries,  and  it  has  been  stated  nants  of 
that  the  location  of  the  margin  of  production  depends  upon  the  j.jqjj 
extent  of  the  land  and  natural  resources  of  a  country  in  pro- 
portion to  its  population  and  capital.     We  have  just  considered 
the  various  influences  that  control  the  growth  of  population 
and  of  capital,  and  w^e  are  now  in  a  position  to  indicate  the  ulti- 
mate determinants  of  distribution. 

In  the  isolated  life  of  a  Crusoe  economic  conduct  requires 
an  exact  balancing  of  the  marginal  satisfactions  or  utilities 
derived  from  consumption  and  the  marginal  sacrifices  or  dis- 
utilities involved  in  production.  Work  should  be  carried  to 
that  point  at  which  pleasure  ceases  to  compensate  for  sacri- 
fices and  at  that  point  it  should  stop.  In  industrial  society 
economic  relations  are  vastly  more  complex.  Marginal  utili- 
ties  are   calculated,    not   by   each    individual    separately,   but 


300  Value,  Price,  and  Distribution 

by  groups  of  individuals.  Marginal  disutilities  include 
not  merely  effort,  but  also  postponed  consumption.  They 
also  are  calculated,  not  by  each  individual  separately,  but 
by  groups  of  individuals,  some  of  whom  contribute  the 
efforts  necesary  to  production  and  others  the  waiting  neces- 
sary to  the  existence  of  the  capital  goods  indispensable  to 
efficient  production.  In  explaining  distribution  we  started  with 
the  valuations  which  consumers  place  upon  goods  and  analysed 
the  causes  which  control  the  division  of  the  values  so  deter- 
mined between  the  factors  which  co-operate  in  production. 
But  consumers  are  as  a  rule  themselves  producers.  Like 
Crusoe,  though  in  a  less  simple  and  direct  way,  they  compare 
the  utilities  of  the  goods  they  consume  with  the  disutilities 
connected  with  the  part  they  play  in  production.  This  is  not 
true  of  consumers  whose  wealth  comes  to  them  because  they 
control  sources  of  funded  income,  since  such  persons  make  no 
present  sacrifices  as  a  condition  to  securing  command  over  pur- 
chasing power.  Nor  is  it  true  of  consumers  who  receive  inter- 
est for  capital  they  have  accumulated,  not  in  order  that  they 
may  secure  interest,  but  in  deference  to  one  of  the  other  mo- 
tives that  have  been  described.  Such  consumers  also  make 
no  present  sacrifice  in  return  for  the  purchasing  power  they 
receive.  Nor  is  it  true  of  workmen  who  find  their  work 
a  pleasure  and  whose  hours  are  fixed  not  by  calculations 
of  marginal  disutility  which  they  themselves  make,  but  by 
standards  determined  by  the  weaker  members  of  the  indus- 
trial groups  to  which  they  belong.*  It  is  true,  however,  of 
capitalists  who  are  just  induced  by  the  promise  of  the  current 
rate  of  interest  to  save  and  invest  in  preference  to  spend- 
ing. Such  men  balance  the  marginal  utilities  of  the  goods 
which  the  interest  will  enable  them  to  command  against  the 
marginal  disutility  of  deferring  consumption.  It  is  also  true 
of  the  marginal  workmen  in  each  group  who  determine  by 
their  calculations  the  length  of  the  working  day  for  their  class. 
For  them  the  marginal  disutility  of  the  final  hour's  labour  is  a 
painful  reality  which  they  balance  in  their  minds  against  the 

*  For  example,  many  a  mechanic  who  limits  his  work  to  eight  hours  a 
day,  would  gladly  work  an  additional  hour  for  proportionate  pay,  but  is 
prevented  from  so  doing  by  loyalty  to  the  rule  of  his  union. 


Utilities  and  Disutilities  301 

added  goods  which  the  pay  for  this  last  hour  enables  them  to 

command.    If  the  balance  is  on  the  negative  side  they  are  ripe 

for  a  strike  for  a  shorter  working  day,  and  if  their  feelings  are 

the  feelings  of  their  group  they  are  likely  to  secure  it. 

Besides  the  calculations  which  determine  the  accumulation  of  '^^^ 
•     1  1     ,       1  1        r     1  1  ,  •  1  1  Balancing 

capital  and  the  length  of  the  normal  workmg  day,  there  are  of  Utilities 

others  which  fix  standards  of  living  and  through  them  con-  ^S''*'"\'f  . 

,  ■  ,      ,  ,  •  ,    •        •       Disutilities 

trol,  perhaps,  the  rate  at  which  the  working  population  in- 
creases. To  maintain  wages  men  in  different  industrial  groups 
incur  the  sacrifices  involved  in  a  postponement  of  marriage,  and 
in  the  long  run  these  sacrifices  are  compensated,  and  only  just 
compensated,  so  far  as  the  standard  of  living  controls  wages, 
by  the  higher  earnings  which  such  conduct  insures  to  the  class 
benefited. 

A  full  analysis  of  the  motives  that  enter  into  the  balancing 
of  utilities  and  disutilities  in  industrial  society,  and  of  the 
equilibrium  that  results  from  them,  belongs  to  a  more  advanced 
treatise  on  economics.  Such  a  balancing  is  one  of  the  condi- 
tions to  the  realisation  of  the  hypothetical  state  of  normal  equi- 
librium to  which  reference  has  so  frequently  been  made  in 
previous  chapters.  In  actual  progressive  societies  changes 
occur  so  frequently  that  the  exact  balancing  of  utilities  against 
disutilities  is  something  constantly  aimed  at,  but  never  secured. 
In  men's  efforts  to  realise  it,  the  ultimate  determinants  of 
values  and  distribution  are,  nevertheless,  to  be  sought. 

REFERENCES  FOR   COLLATERAL   READING 

*Mayo-Sinith,  Statistics  and  Sociology,  Book  I.,  Chaps.  V.,  VI.,  and 
VII.,  and*  Statistics  and  Economics,  Book  I.,  Chap.  V.;  Giffen,  The 
Growth  of  Capital;  *  Clark,  The  Distribution  of  Wealth,  Chap. 
XXIV.;  *  Marshall,  Principles  of  Economics,  Book  IV.,  Chaps.  IV. 
and  VII.,  Book  VI.,  Chap.  XL;  Nicholson,  Principles  of  Political 
Economy,  Book  I.,  Chaps.  XI.  and  XII.;  Bohm-Bawcrk,  The  Ulti- 
mate Standard  of  Value  (article  in  Annals  of  Atnertcan  Academy  of 
Political  and  Social  Science, Yo\.  V.  pp.  i4g-2oS);*Feller,  Principles 
of  Economics,  Chap.  43. 


CHAPTER  XVII 

MONEY    AND  THE   MONETARY  SYSTEM   OF  THE  UNITED 

STATES 

The  Dis-  §  i68.  As  has  already  been  pointed  out,*  every  extension  of 

of  Barter  co-operation  and  the  division  of  labour,  beyond  the  simple  divi- 
sion of  tasks  possible  within  the  family,  must  be  accompanied 
by  a  corresponding  development  of  the  system  of  exchange. 
The  simplest  kind  of  exchange  is  barter ;  but  this  has  serious 
drawbacks,  since  it  can  take  place  only  when  two  traders  come 
together,  each  having  in  his  possession  a  commodity  preferred 
by  the  other.  Even  this  unusual  situation  will  not  lead  to  an 
exchange  unless  the  parties  can  agree  as  to  the  terms  of  the 
bargain.  Thus,  under  the  system  of  barter,  the  American  In- 
dian with  a  pony  to  dispose  of  had  to  wait  until  he  met  another 
Indian  who  wanted  a  pony  and  at  the  same  time  was  able  and 
willing  to  give  for  it  a  blanket  or  other  commodity  that  he 
himself  desired.  Even  when  pony  and  blanket  came  to- 
gether an  exchange  through  barter  might  be  prevented  by  the 
fact  that  one  of  the  owners  thought  his  commodity  worth  some- 
what more  than  that  of  the  other.  Neither  pony  nor  blanket 
could  be  divided,  and  in  consequence  higgling  over  the  trade 
would  be  quite  as  likely  to  lead  to  a  quarrel  as  to  a  transfer 
of  property. 
The  Nature  The  inconveniences  connected  with  barter  led,  at  an  early 
tions  of  "  period  in  the  history  of  civilisation,  to  the  introduction  of  a 
Money  medium  of  exchange,  or  money.    Although  no  exact  account  of 

the  steps  preceding  this  important  innovation  has  been  pre- 
served, it  is  not  difficult  to  reconstruct  in  imagination  the  cir- 
cumstances which  determined  the  choice  of  the  medium  of 
exchange  and  caused  it  gradually  to  come  into  general  use. 
Inability  to  barter  surplus  products  for  the  exact  commodities 
desired  must  have  suggested  the  feasibility  of  bartering  them 

♦Section  77.  Chapter  VIII. 
302 


The  Functions  of  Money  303 

for  other  products  that  were  in  more  general  demand,  more 
durable,  or  for  some  other  reason  more  exchangeable  than  the 
former.  Thus  the  owner  of  surplus  game  who  was  unable  to 
get  for  it  the  arrow-heads  he  desired,  would  be  glad  to  accept 
instead  some  durable  ornament  generally  prized  in  the  com- 
munity, such  as  a  string  of  beads.  His  chance  of  exchanging 
the  latter  for  arrow-heads  would  be  excellent,  and  would 
certainly  be  preferred  to  the  prospect  of  having  his  game  spoil 
on  his  hands.  In  some  such  way  commodities  would  come  to 
be  distinguished  even  in  primitive  communities  by  reference 
to  their  exchangeability,  and  the  most  exchangeable  commodity 
would  gradually  come  into  use  as  a  medium  of  exchange. 

Quite  as  important  as  a  medium  of  exchange  to  the  develop-  Money  a 
ment  of  an  industrial  community  is  a  standard,  or  common  de-  of'^Vaiue 
nominator,  by  means  of  which  the  values  of  commodities  may 
be  compared.  Without  such  a  standard  the  value  ratio  between 
each  commodity  and  every  other  commodity  must  be  remem- 
bered by  the  trader.  For  example,  if  he  deals  in  ten  commod- 
ities there  will  be  forty-five  ratios  of  exchange  to  be  remem- 
bered, and  these  will  increase  by  multiplication  to  1225  if  he 
deals  in  as  many  as  fifty  commodities.  The  use  of  a  standard 
of  value  enables  the  trader  to  substitute  for  the  forty-five  possi- 
ble exchange  ratios  in  the  first  case,  the  nine  ratios  between 
fhe  value  of  the  selected  commodity  and  the  values  of  the 
others,  and  in  the  second  case  for  the  1225  possible  exchange 
ratios,  49  ratios.  The  smaller  number  of  ratios  under  the 
new  system  tell  exactly  the  same  story  as  the  larger  number 
did  before.  Thus,  instead  of  remembering  that  a  string  of 
beads  is  worth  four  deer,  that  two  deer  are  worth  an  arrow- 
head, and  that  two  arrow-heads  are  worth  a  string  of  beads, 
it  suffices  for  the  trader  to  remember  that  a  deer  is  worth 
one-quarter,  and  an  arrow-head  one-half  of  a  string  of  beads. 
To  serve  as  a  standard  or  common  denominator  of  value  is 
a  second  function  of  money,  and  to  fulfil  it,  as  to  fulfil  the 
first,  the  commodity  selected  for  the  purpose  must  possess  in 
high  degree  the  quality  of  exchangeability. 

In  addition  to  serving  as  a  medium  of  exchange  and  a  stand-  Also  of 
ard  for  comparing  exchange  values,  money,  or  the  monetary  PavmenV 
unit,  serves  in  modern  industrial  communities  as  the  medium 


Prices  and 
the  Value 
of  Money 
Vary 
Inversely 


Stability 
of  Value  a 
Desirable 
Attribute 
of  Money 


Various 
Commodi- 
ties Used 
as  Money 
in  the  Past 


304       Money  and  the  Monetary  System 

for  credit  transactions  or  deferred  payments.  Promises  to 
pay  in  the  future  for  value  received  in  the  present  are  habitually 
expressed  in  terms  of  money.  To  serve  as  a  standard  for  de- 
ferred payments  is  thus  money's  third  function. 

§  169.  Price,  as  already  explained,  is  exchange  value  meas- 
ured in  term.s  of  money.  In  the  United  States  and  other 
gold-standard  countries  prices  express  the  value  ratios  between 
the  commodities  priced  and  gold.  To  say  that  a  bushel  of 
wheat  is  worth  $1  is  to  say  that  a  bushel  of  wheat  will  ex- 
change for  23.22  grains  of  pure  gold,  since  the  latter  is  the 
standard  dollar  of  the  country.  If  the  price  of  wheat  should 
rise  to  $1.25  (i.  e.,  to  29.021^^  grains  of  pure  gold),  the  value 
of  gold  measured  in  terms  of  wheat  will  have  fallen  correspond- 
ingly. One  dollar,  or  23.22  grains  of  gold,  will  now  exchange 
for  only  four-fifths  of  a  bushel  of  wheat.  Thus  every  change 
in  price  registers  a  corresponding  change  in  the  exchange  value 
of  gold  measured  in  terms  of  the  commodity  priced.  To  deter- 
mine with  certainty  whether  any  given  change  is  due  to  a 
change  in  the  value  of  the  commodity,  or  in  the  value  of  gold, 
the  standard  money,  it  is  necessary  to  make  a  general  compari- 
son in  which  all  important  commodities  are  included  for  the 
two  periods.  If  in  the  given  case  it  should  be  found  that  while 
the  price  of  wheat  rose  other  prices  remained  constant  or  fell,  it 
might  fairly  be  concluded  that  the  value  of  gold  had  not  fallen 
and  that  the  change  was  due  to  a  rise  in  the  value  of  wheat. 

Some  writers  describe  money  as  the  measure  of  values,  but  it 
is  evident  that  it  is  not  a  measure  to  be  compared  with  a  foot- 
rule  or  a  bushel.  It  is  a  convenient  standard  for  comparing 
values  or  a  common  denominator  to  which  all  values  may  be 
reduced ;  but  as  a  measure  of  values  in  any  absolute  sense  it 
is  untrustworthy,  since  it  is  itself  variable  in  value.  This 
variability  is  a  source  of  annoyance  and  loss  to  the  business 
community,  and  hence,  as  explained  in  the  next  section,  sta- 
bility of  value  is  one  of  the  qualities  essential  to  a  good  money. 

§  170.  Present-day  monetary  systems  are  the  result  of  an 
historical  evolution.  In  the  past,  in  different  countries,  nearly 
every  kind  of  commodity  has  served  as  money.  The  ox  is  the 
standard  of  value  referred  to  in  the  earliest  literature  of  Greece 

0 

and  Rome.     In  Africa  cubes  of  salt  have  been  used.     Tea 


Qualities  of  a  Good  Money  305 

was  used  at  one  time  in  parts  of  Asia.  In  America  the  In- 
dians used  strings  of  beads,  which  they  called  wampum, 
and  for  a  time  wampum  was  also  used  for  small  payments 
between  the  colonists  in  New  England.  In  Virginia  tobacco 
long  served  as  the  standard  of  value,  and  efforts  were  made  to 
fix  by  law  the  value  ratio  between  it  and  the  coins  which  found 
their  way  to  the  colony  from  Europe.  As  a  result  of  experi- 
ment, all  civilised  countries  have  now  come  to  the  use  of  the 
metals  as  money,  and  all  of  the  more  important  commercial 
countries  have  fixed  upon  gold  as  their  standard  and  relegated 
other  metals  to  a  subordinate  position  in  their  monetary  sys- 
tems. The  reasons  for  the  preference  for  gold  become  clear 
from  a  consideration  of  the  qualities  which  should  be  possessed 
by  a  good  money. 

Economists  quite  generally  agree  that  the  commodity  Qualities 
selected  to  serve  as  money  should  have  the  following  qualities :  ^  Good 
(i)  value,  (2)  durability,  (3)  portability,  (4)  homogeneity,  Money 
(5)  divisibility,  (6)  cognisability,  and  (7)  stability  of  value. 
That  the  commodity  which  is  to  serve  as  the  intermediary  be- 
tween valuable  things  must  itself  have  value  is  obvious.  Dura- 
bility is  important  because  after  each  exchange  transaction  the 
medium  of  exchange  must  remain  for  a  longer  or  shorter  time 
in  the  possession  of  the  seller.  Unless  it  is  durable,  it  will 
depreciate  during  this  interval  to  the  seller's  loss.  This  con- 
sideration precludes  the  use  of  perishable  articles  as  money  and 
accounts  for  the  w^orld's  preference  for  the  precious  metals, 
which  are  as  durable,  when  alloyed  with  copper,  as  anything 
known  to  man.  Portability  is  indispensable  to  the  convenience 
of  a  medium  of  exchange.  Other  things  being  equal,  the  com- 
modity which  compresses  the  greatest  value  in  the  smallest 
bulk  is  the  most  economical  medium  of  exchange  for  large 
transactions.  In  this  respect  gold  is  superior  to  silver  and  this 
accounts  in  part  for  the  preference  for  it  of  leading  commercial 
nations.  Homogeneity  and  divisibility  are  related  qualities, 
since  together  they  insure  that  the  commodity  used  as  money 
may  be  divided  and  subdivided  without  loss  in  value.  These 
qualities  also  distinguish  the  metals.  Cognisability  is  impor- 
tant as  it  renders  difficult  the  circulation  of  counterfeit  money. 
One  objection  to  silver  is  the  resemblance  to  it  of  the  baser 


3o6        Money  and  the  Monetary  System 

metals  lead  and  tin.  The  last  quality,  stability  of  value,  is 
essential  in  connection  with  the  function  which  the  monetary 
unit  performs  as  a  standard  of  deferred  payments.  In  the  ab- 
sence of  such  stability  creditors  and  debtors  have  no  guarantee 
that  the  contract  between  them  calling  for  the  payment  of  a 
certain  sum  of  money  at  a  future  date  will  involve  the  return 
of  a  value  equivalent  to  that  loaned.  If  the  value  of  money 
rises  in  the  interval  the  debtor  will  be  injured,  if  it  falls  the 
creditor  will  receive  less  than  he  anticipated.  Either  event 
must  discourage  transactions  involving  such  an  uncertain  ele- 
ment, and  it  is  for  this  reason  that  the  importance  of  stability 
of  value  in  the  commodity  which  is  to  serve  as  money  can 
hardly  be  exaggerated.  As  regards  this  quality  also  the 
precious  metals  have  a  marked  superiority  over  most  other 
things.  The  demand  for  them  is  very  elastic  because  they 
serve  such  a  variety  of  different  purposes.  They  are  highly 
prized  as  ornaments,  they  are  used  in  watch-cases,  family  plate, 
etc.,  as  badges  of  social  position ;  they  serve  important  indus- 
trial uses  in  connection  with  dentistry,  etc.,  and  finally  they  are 
now  so  widely  used  as  money  that  the  monetary  demand  for 
them  is  large.  On  the  side  of  supply  the  conditions  are  equally 
favourable  to  stability  of  value.  Because  they  are  precious 
and  at  the  same  time  durable,  the  greater  part  of  the  total 
quantity  produced,  at  least  in  modern  times,  has  been  preserved 
and  is  still  available  to  satisfy  current  needs.  In  proportion 
to  the  total  stock  (estimated  in  the  case  of  gold  at  $10,000,000,- 
000)  the  addition  to  the  supply  due  to  production  each  year  is 
insignificant.  The  supply  is  thus  practically  constant  over 
short  periods  and  is  little  affected  by  variations  in  the  annual 
output  of  the  world's  mines.  Elasticity  of  demand  and  con- 
stancy of  supply,  the  conditions  favourable  to  stability  of  value, 
are  thus  presented  by  the  precious  metals  as  by  no  other  com- 
modities. As  regards  these  characteristics  there  is,  perhaps, 
little  to  choose  between  gold  and  silver.  The  world's  prefer- 
ence for  the  former  must  be  explained  chiefly  by  its  higher 
value  in  proportion  to  its  bulk  and  its  readier  cognisability. 

§  171.  The  choice  of  the  medium  of  exchange  and  standard 
of  value  was  a  subject  which  early  engaged  the  attention  of 
organised  governments.     They   did  not  create  the  monetary 


Coinage  and  the  Printing"  of  Paper  Money    307 

systems  that  are  found  to-day,  but  they  gave  them  a  legal  sane-  The  Role 
tion  which  has  added  materially  to  their  efficiency.     Laws  at  q/'V^^t^I!^. 
present  control  the  monetary  systems  of  civilised  countries  in  in  eonnec- 
two  vital  respects :  they  declare  what  forms  of  money  shall  >^i°  q^^^*^^ 
be   a   legal   tender,   that   is,    shall   be   accepted    in    legal    pay- 
ment of  all  obligations  calling  for  money,  either  between  indi- 
viduals or  between  the  state  itself  and  its  subjects,  and  they 
determine  the  conditions  under  which  these  forms  of  money 
and  other  media  of  exchange  that  serve  the  convenience  of  the 
business  community  shall  be  manufactured  and  put  into  circu- 
lation. 

The  manufacture  of  metallic  money  is  called  coinage  and  Coinage 
has  become  a  government  monopoly  in  all  advanced  countries.  Printing 
for  the  simple  reason  that  this  has  been  found  by  experience  to  of  Paper 
be  the  only  means  by  which  a  perfectly  reliable  coinage  system  ^ 

can  be  maintained.  At  first  coining  consisted  merely  in  stamp- 
ing the  head  of  the  sovereign  and  an  indication  of  the  weight 
of  the  coin  on  one  of  the  faces  of  a  flat  disc  of  metal.  So  long 
as  this  only  was  done,  it  was  necessary  at  every  transaction  to 
weigh  the  pieces  of  money  ofifercd  in  exchange  to  make  sure 
that  they  had  not  been  "  clipped  "  since  leaving  the  mint.  This 
necessity  was  obviated  by  the  second  step  in  the  progress  of 
coinage,  which  was  to  stamp  the  reverse  face  of  the  disc  of 
metal.  A  third  step  consisted  in  "  milling  "  the  edges  of  the 
coin  and  thereby  rendering  it  impossible  to  clip  it  without  de- 
tection. At  the  same  time  that  these  improvements  in  the 
process  of  coinage  were  made,  stringent  regulations  were 
passed  forbidding  the  clipping  and  "  sweating  "  of  coins,  and 
requiring  those  having  in  their  possession  coins  whose  weight 
had  been  reduced  below  a  certain  standard  to  return  them  to 
the  mint,  so  that  they  might  be  remelted  and  reissued  at  full 
weight.  Withdrawing  the  character  of  legal  money  from 
"  light  "  coins  has  proved  a  simple  and  effective  method  of 
enforcing  the  latter  provision.  In  addition  to  coins,  most 
modern  governments  issue  one  or  more  forms  of  paper  money. 
Although  devised  originally  as  a  means  of  securing  revenue 
for  hard-pressed  sovereigns,  such  money,  on  account  of  its  con- 
venience, has  won  for  itself  a  permanent  place  among  the  media 
of   exchange   preferred    by    intelligent   business   communities. 


3o8       Money  and  the  Monetary  System 

Printing  and  engraving  paper  notes  have  thus  become  as 
important  a  function  of  government  as  minting  coins,  and 
quite  as  great  progress  has  been  made  in  manufacturing  notes 
that  are  at  once  durable  and  so  cognisable  as  to  defy  the  inge- 
nuity of  counterfeiters. 
Standard,  In  the  monetary  systems  of  most  modern  states  three  dif- 

Credit'  ferent  kinds  of  money  may  be  distinguished,  i.  e.,  standard, 

Money  token,  and  credit  money.     Standard  money  is  that  to  the  value 

of  which  the  values  of  all  other  kinds  of  money  in  circulation 
are  adjusted.  It  may  be  self-regulating,  as  when  the  law  de- 
clares that  a  certain  weight  of  the  metal  selected  for  the  stand- 
ard shall  constitute  the  standard  coin  and  permits  all  persons 
bringing  such  metal  to  the  government  mints  to  have  it  con- 
verted into  coin  either  gratuitously  or  on  the  payment  of  a 
small  fee,  called  seigniorage.  This  system  is  designated  "  free 
coinage,"  and  has  been  adopted  by  all  the  more  important  com- 
mercial nations.  Alternative  to  it  is  the  system  of  "  fiat " 
money,  that  is,  money  issued  on  the  authority  of  the  govern- 
ment and  made  to  circulate  by  being  declared  a  legal  tender. 
Such  money  is  usually  accepted  at  the  outset  with  some  mis- 
givings, but  after  a  time  people  become  accustomed  to  it,  and  if 
the  amount  issued  is  controlled  so  that  there  are  no  violent 
changes  in  the  value  of  the  monetary  unit,  it  may  serve  nearly 
as  well  for  ordinary  transactions  as  self-regulating  money. 

Token  money  is  money  which  is  issued  for  use  as  small 
change  in  connection  with  minor  transactions.  It  is  usually 
made  of  a  baser  metal  than  the  standard  and  put  out  in  just  the 
quantity  that  suits  the  convenience  of  the  business  community. 
Credit  money  supplements  standard,  and  is  issued  on  the  credit 
of  the  government.  It  is  redeemable  in  standard  coin  on  de- 
mand, and  differs  from  token  money  in  that  it  is  designed  to 
serve  as  a  medium  of  exchange  for  large  as  well  as  small  trans- 
actions. As  business  communities  learn  to  appreciate  the 
superior  convenience  of  paper  money,  the  field  for  credit  money 
steadily  widens.  In  the  United  States  a  stage  has  already  been 
reached  where  credit  and  token  money  constitute,  with  credit 
substitutes  for  money  such  as  checks  and  drafts,  practically  the 
entire  medium  of  exchange  of  the  country. 

§  172.  From  early  times  governments  have  struggled  to  keep 


Gresham's  Law  309 

different  kinds  of  money  in  concurrent  circulation.  The  ill  sue-  Gresham's 
cess  of  such  efforts  led  in  the  sixteenth  century  to  the  formula-  ^^^ 
tion  by  Sir  Thomas  Gresham,  one  of  the  advisers  of  Elizabeth, 
of  the  principle  known  as  Gresham's  Law.  This  is  to  the  effect 
that  when  two  or  more  kinds  of  money  circulate  concurrently, 
that  kind  the  material  of  which  is  most  enhanced  in  value  by 
being  given  monetary  form  tends  to  drive  out  of  circulation 
those  kinds  the  materials  of  which  have  been  less  enhanced  or 
unchanged  in  value  by  being  given  monetary  form,  that  is, 
cheaper  tends  to  drive  dearer  money  out  of  circulation.  This 
seems  very  like  asserting  that  poor  money  tends  to  drive  out 
good  and  needs  careful  explanation. 

An  illustration  will  help  to  make  clear  the  reasons  back  of  An 
Gresham's  Law.  In  1792  the  Congress  of  the  United  States 
passed  a  coinage  law  adopting  the  bimetallic  system.  Both  gold 
and  silver  dollars  were  made  full  legal  tender,  and  the  Secre- 
tary of  the  Treasury  was  instructed  to  coin  both  metals  freely 
for  all  applicants,  and  to  put  fifteen  times  as  much  silver  into  the 
standard  silver  dollar  as  he  put  of  gold  into  the  standard  gold 
dollar.  This  is  conveniently  expressed  by  saying  that  the  law 
provided  for  a  mint  ratio  of  15  to  i.  Some  time  after  this  act 
went  into  effect  the  market  or  commercial  ratio  between  silver 
and  gold  became  153^  to  i,  /.  e.,  in  the  bullion  markets  of  the 
world  i55<2  ounces  of  silver  exchanged  for  one  ounce  of  gold. 
The  situation  then  was  that  our  mint  coined  bullion  into  money, 
making  fifteen  ounces  of  silver  the  equivalent  of  an  ounce  of 
gold,  while  in  the  world's  market  an  ounce  of  gold  was  equiva- 
lent to  155^  ounces  of  silver.  Silver  coin  was  made  by  law 
just  as  good  money  as  gold  within  the  limits  of  the  United 
States,  and  was  therefore  the  cheaper  medium  for  the  payment 
of  debts  within  the  country.  According  to  Gresham's  Law  it 
should  have  driven  gold  out  of  circulation,  and  this  it  did,  in 
fact,  as  soon  as  the  situation  was  understood.  Since  an  ounce 
of  gold  would  buy  fifteen  and  a  half  ounces  of  silver  abroad, 
while  the  American  mint  would  give  to  fifteen  ounces  of  silver 
the  same  monetary  power  that  an  ounce  of  gold  enjoyed,  it 
was  profitable  to  export  gold  coin,  exchange  it  for  silver  bullion, 
import  the  latter,  and  have  it  converted  into  the  overvalued 
silver  money.     For  this  reason  such  gold  as  was  coined  was 


Gresham's 
Law  and 
the  Present 
Monetary 
System  of 
the  United 
States 


The 

Adoption 
@£  the  Gold 
Standard 
in  Europe 


310       Money  and  the  Monetary  System 

withdrawn  from  circulation,  and  the  country  was  brought  to 
the  cheaper  silver  standard. 

The  above  demonstration  of  Gresham's  Law  may  seem  to 
prove  too  much.  If  silver  drove  out  gold  after  1792,  why,  it 
may  be  asked,  does  it  not  now  drive  out  gold,  and  why  does  not 
paper  money  drive  out  both  gold  and  silver  ?  The  reason  is  not 
far  to  seek.  Gresham's  Law  describes  a  tendency.  After  1792 
that  tendency  was  quickened  into  active  life  because  the  free 
coinage  of  silver  opposed  no  obstacle  to  the  substitution  of  the 
cheaper  for  the  dearer  money,  so  long  as  any  of  the  latter  re- 
mained in  circulation.  To-day  the  tendency  is  dormant  because 
the  quantity  of  silver  and  paper  money  put  into  circulation  is 
rigidly  limited,  and  is  far  from  sufficient  to  meet  the  monetary 
needs  of  the  country.  This  cheaper  money,  at  the  time  it  was 
first  issued,  did  drive  out  gold ;  but  obviously  it  could  not 
drive  out  more  dollars  than  it  could  itself  replace.  The  limita- 
tion on  its  supply  permits  some  gold  to  remain  in  circulation. 
Gresham's  law  still  operates,  however,  as  every  bullion  broker 
knows,  when  gold  is  to  be  exported,  for  at  such  times  great 
pains  are  taken  to  select  only  full-weight  coins  for  shipment. 
Any  circumstance  which  should  increase  the  volume  of  silver 
or  paper  money  in  circulation  or  reduce  the  country's  need  for 
money,  would  serve  to  increase  the  exportation  of  gold  coins, 
and,  if  persistent,  might  cause  light  as  well  as  full-weight  coins 
to  be  withdrawn  until  no  gold  was  left  in  circulation. 

§  173.  In  adopting  the  bimetallic  system  in  1792  the  L'nited 
States  simply  fell  in  with  the  general  practice  of  European 
nations.  That  system  has  since  been  given  up,  as  the  result  of 
the  conviction  impressed  upon  one  country  after  another  that 
gold  and  silver  cannot  be  kept  in  concurrent  circulation  at  any 
arbitrarily  established  mint  ratio.  England  was  one  of  the 
first  countries  to  arrive  at  this  conclusion,  having  adopted  the 
single  gold  standard  in  181 6.  On  the  continent  the  struggle 
to  maintain  a  double  standard  was  continued  until  the  third 
quarter  of  the  last  century.  Finding  it  difficult  to  keep  both  gold 
and  silver  in  circulation  at  a  parity  without  the  co-operation  of 
other  nations,  France  and  some  of  the  other  states  of  Southern 
Europe  established  in  1865  the  so-called  Latin  Union,  which 
had  this  for  one  of  its  principal  objects.     From  1803  to  1873, 


The  Adoption  of  the  Gold  Standard     311 

France  and  the  Latin  Union  succeeded  in  keeping  botli  gold 
and  silver  in  circulation  at  their  established  mint  ratio  of  i  to 
153/2.  During  the  entire  period  the  market  ratio  between  the 
two  metals  varied  *  but  slightly  from  this  mint  ratio.  In  1873 
several  circumstances  united  to  compel  France  to  abandon  the 
policy  which  she  had  so  long  upheld.  Chief  among  these  was 
the  increased  production  of  silver,  due  to  silver  discoveries  in 
America,  which  lowered  the  value  of  that  metal  and  caused  its 
substitution  on  a  large  scale  for  the  country's  dearer  gold  coin. 
Seeing  their  gold  disappearing  from  circulation  and  fearing 
that  they  would  be  brought  to  the  cheaper  standard,  the  coun- 
tries of  the  Latin  Unioji  decided  in  1874  to  limit  the  coinage  of 
silver,  and  in  1878  to  close  their  mints  altogether  to  the  free 
coinage  of  that  metal.  By  this  action  they  maintained  their 
dearer  standard,  which  was  thenceforth  gold.  About  the  sam.e 
time  (1871-73),  Germany  adopted  the  single  gold  standard  by 
limiting  the  coinage  of  silver  so  that  the  silver  money  in  circu- 
lation should  never  exceed  ten  marks  per  capita.  Holland, 
Norway,  Sweden,  and  Denmark  were  not  slow  to  follow  the 
example  of  their  southern  neighbours.  More  tardily  Austria- 
Hungary  (1892-1902)  and  Russia  (1896),  which  for  several 
years  had  had  depreciated  paper  currencies  as  their  chief  media 
of  exchange,  accumulated  sufficient  gold  to  establish  securely 
the  gold  standard.  Thus  at  the  end  of  the  nineteenth  century 
all  of  the  important  nations  of  Europe  except  Spain  had  the 
gold  standard  in  actual  operation. 

Outside  of  Europe  a  similar  development  was  in  progress  Its 
during  the  same  period.     The  British  dependencies,  Canada,  Outside*o£ 
Cape  Colony,  and  the  States  of  Australasia  have  long  been  on  Europe 
the  gold  basis.     India  suspended  the  free  coinage  of  silver  in 
1893,  and  by  1899  had  accumulated  enough  gold  in  London  to 
maintain  the  silver  coin,  which  continued  to  be  the  principal 
medium  of  exchange  of  the  country,  at  a  fixed  parity  with  the 
gold  coinage  of  England  ( 15  rupees  =  £1).    Gold  thus  became 
the  country's  real  standard  of  value.     Japan  adopted  the  single 
gold  standard  in   1898.     At  the  close  of  the  nineteenth  cen- 

*  The  extreme  variations  were  from  a  ratio  of  i  to  ib%  in  1813  to  a 
ratio  of  i  to  15.19  in  1859.  Cf-  Shaw,  T/ie  History  of  Currency,  1232 
io  i8g4,  p.  159. 


Monetary 
History  of 
the  United 
States 


312       Money  and  the  Monetary  System 

tury  only  China  and  Mexico,  among  the  important  nations  of 
the  world,  remained  on  the  silver  basis,  and  at  the  time  of  writ- 
ing (July,  1903)  even  these  countries  are  taking  measures  to 
establish  a  fixed  parity  between  their  silver  currencies  and  gold 
in  some  such  manner  as  did  India  in  1899.  When  these  meas- 
ures become  effective  gold  will  be  the  standard  of  value  of 
the  entire  commercial  world. 

§  174.  As  already  explained,  the  first  coinage  law  of  the 
United  States  gave  the  country  a  mint  ratio  so  unfavourable  to 
gold  that  silver  became  in  time  its  actual  standard  of  value  and 
medium  of  exchange.  It  was  not  until  1834  that  Congress  at- 
tempted to  change  this  situation.  In  order  to  bring  gold  back 
into  circulation,  acts  were  passed  in  that  year  and  in  1837  estab- 
lishing the  present  mint  ratio  between  gold  and  silver,  which 
is  I  to  15.988.*  The  standard  silver  dollar  was  to  contain 
371.25  grains  of  pure  silver  as  under  the  act  of  1792,  and  the 
standard  gold  dollar  23.22  grains  of  pure  gold.  Both  were  to 
be  9-10  fine.  This  new  ratio  undervalued  silver  nearly,  if  not 
quite,  as  much  as  the  former  had  overvalued  it,  since  the  com- 
mercial ratio  between  gold  and  silver  continued  to  be  about  i 
to  15/^.  In  obedience  to  Gresham's  Law,  silver  now  disap- 
peared from  circulation  and  gold  became  the  real  standard  of 
value  of  the  country.  This  situation  continued  down  to  the 
time  of  the  Civil  War.  During  that  struggle  United  States 
notes  or  greenbacks  were  issued  in  excessive  quantity,  with  the 
result  that  gold  also  disappeared  from  circulation  and  the  coun- 
try was  brought  to  a  paper  standard.  Thus  when  the  war  closed, 
and  for  some  years  thereafter,  neither  gold  nor  silver,  except 
the  subsidiary  coin  used  for  small  change,  was  in  circulation. 
In  1873,  after  considering  the  subject  during  successive  ses- 
sions, Congress  passed  a  law  omitting  the  standard  silver  dollar 
from  the  list  of  authorised  coins.  At  the  time  this  action  at- 
tracted little  attention,  but  a  few  years  later,  when  the  question 
of  resuming  specie  payments  was  under  consideration  and  silver 
producers  were  suffering  from  the  decline  in  the  gold  price  of 
their  product,  there  arose  a  violent  agitation  for  the  remoneti- 
sation  of  silver.  In  1878  Congress  passed  what  is  known  as 
the  "  Bland-Allison  Act,"  which  reintroduced  the  silver  dollar 

*The  "  16  to  I  "  of  recent  campaign  arguments. 


The  Gold  Standard  Law  313 

and  required  the  Secretary  of  the  Treasury  to  purchase  monthly 
from  $2,000,000  to  $4,000,000  worth  of  silver  bullion  and  coin 
it  into  standard  dollars.  The  gold  price  of  silver;  continued  to 
fall,  and  this  led  in  1890  to  the  enactment  of  a  second  law, 
known  as  the  "  Sherman  Act,"  which  required  the  Secretary  of 
the  Treasury  to  purchase  monthly  4,500,000  ounces  of  fine 
silver  so  long  as  the  market  ratio  between  silver  and  gold 
should  be  less  favourable  to  silver  than  the  mint  ratio,  and  to 
pay  for  it  by  the  issue  of  so-called  Treasury  notes  redeemable 
in  coin  and  possessing  full  legal-tender  power. 

As  a  result  of  the  Bland-Allison  and  Sherman  Acts,  554,000,-  The  Gold 
000  silver  dollars  were  coined  in  the  United  States  from  1878  ^a^w  ^ 
to  July  I,  1903.  Of  these,  less  than  75,000,000  have  ever  been 
in  circulation  because  of  the  awkwardness  of  the  silver  dollar 
as  a  medium  of  exchange.  The  remaining  dollars  have  been 
represented  by  silver  certificates,  redeemable  in  silver  dollars 
on  demand.  The  consequence  of  this  large  increase  in  the  silver 
currency  of  the  country  was  to  cause  gold  to  be  withdrawn  from 
circulation.  This  tendency  became  so  marked  after  the  passage 
of  the  Sherman  Act  that  serious  fears  were  entertained  lest  the 
gold  standard,  which  had  been  re-established  January  i,  1879, 
should  be  displaced  by  a  cheaper  standard.  In  March,  1893,  a 
special  session  of  Congress  was  called  by  President  Cleveland 
for  the  sole  purpose  of  repealing  the  purchase  clause  of  the 
Sherman  Act,  which  was  finally  done  in  October  of  that  year. 
After  much  further  agitation,  the  logical  sequence  to  this  policy 
followed  on  March  14,  1900,  when  Congress  passed  a  law 
definitely  affirming  that  gold  is  the  standard  of  value  of  the 
country. 

§  175.  On  July  I,  1903,  there  were  in  general  circulation  in  Present 

the  United  States  eight  diflferent  kinds  of  monev.    The  amounts  c  '"^If^r 

'^  -  System  of 

of  each  kind  in  circulation  and  in  the  Treasury,  as  shown  by  tlie  United 
the  statement  of  the  Secretary  of  the  Treasury'  for  that  date,      ^  ^^ 
were  in  round  numbers  as  follows  :  Gold  coin  and  bars,  $1,253,- 
000,000;  (gold  certificates,  $379,000,000)  ;  standard  silver  dol- 
lars, $554,000,000;  (silver  certificates,  $455,000,000)  ;  subsidi- 
ary coin,  $102,000,000;  Treasury  notes,  $19,000,000;  United 
States  notes.  $347,000,000;  national  bank  notes,  $414,000,000 
The   gold    and    silver   certificates   are   placed    in   parentheses 


Gold  Coin 
Kept  at  a 
Constant 
Parity  in 
Value  with 
Gold  in 
Coin 


314       Money  and  the  Monetary  System 

because  they  stand  for  gold  and  silver  included  in  the  first  and 
third  items.  The  total  money  supply  of  the  country  was,  there- 
fore, $2,688,000,000,  of  which  $312,000,000  was  held  in  the 
United  States  Treasury  as  assets  of  the  Government.  This 
represented  an  estimated  circulation  per  capita  of  $29.39. 

As  already  stated,  it  is  the  monetary  policy  of  the  United 
States  to  maintain  an  exact  parity  between  the  value  of  its  gold 
coin  and  the  value  of  the  gold  in  such  coin  and  between  the 
value  of  gold  money  and  the  seven  other  varieties  of  money 
enumerated.  How  this  is  effected  will  now  be  explained.  The 
value  of  gold  coin  is  prevented  from  exceeding  the  value  of 
the  gold  in  such  coin  by  the  policy  of  free  and  gratuitous  gold 
coinage.  Anyone  who  has  gold  in  any  form  may  take  it  to 
the  mint  and  have  it  converted  into  coin  free  of  charge.  He 
need  not  even  wait  for  the  process  of  coinage  to  be  completed, 
as  the  Treasury  issues  gold  certificates  for  bullion  left  on  de- 
posit. In  fact,  the  policy  of  the  Government  towards  owners 
of  gold  bullion  in  any  form  is  so  liberal  that  practically  the 
entire  product  of  the  gold  mines  of  the  country  is  now  sent  to 
the  Government  assay  offices  or  Government  mints  to  be  con- 
verted into  commercial  bars  or  standard  coins.  This  free 
convertibility  of  bullion  into  coin  prevents  gold  coin  from  ever 
becoming  more  valuable  than  its  gold  contents.  Any  tendency 
in  this  direction  is  promptly  checked  by  a  multiplication  of  coins 
and  a  reduction  of  the  gold  supply  in  other  forms. 

Gold  coin  is  prevented  from  becoming  less  valuable  than  the 
gold  it  contains  by  the  simple  fact  that  it  may  be  diverted  with 
little  loss  to  any  other  use  for  which  gold  is  adapted.  It  is 
always  potential  bullion,  and  is  treated  as  actual  bullion  to  be 
thrown  into  the  melting  pot,  exported,  or  dealt  with  in  any 
other  way  that  seems  desirable  whenever  its  bullion  value 
exceeds  ever  so  slightly  its  coin  value.  Free  and  gratuitous 
coinage  on  the  one  hand  and  the  ever-ready  melting  pot  on 
the  other,  are  thus  the  influences  which  maintain  the  constant 
parity  between  the  value  of  gold  coin  and  the  value  of  its  gold 
contents.  • 

§  176.  The  maintenance  of  the  parity  between  gold  and  the 
other  varieties  of  money  is  a  more  complicated  matter.  Gold 
certificates  are  kept  at  par  by  the  fact  that  they  are  redeemable 


The  Gold  Reserve  315 

at  the  pleasure  of  the  holder  in  the  gold  coin    in  exchange  for  How  the 

which   they  are   issued,   and   which   is   held   in   the  Treasury  ;^^^^^^^',, 
■'  '  -^    tween  Gold 

as  a  trust  fund.  Standard  silver  dollars,  which,  like  gold  and  Silver 
coin,  possess  full  legal-tender  power,  are  kept  at  a  parity  j^iaintained 
with  gold  because  they,  too,  are  freely  exchangeable  at  the 
United  States  Treasury  for  gold  or  any  other  form  of  money 
that  is  desired.  There  is  no  law  expressly  requiring  their  re- 
demption in  gold,  but  law^s  have  over  and  over  again  affirmed  it 
to  be  the  settled  policy  of  the  United  States  to  maintain  a  parity 
between  its  gold  and  silver  coins,  and  prompt  redemption  of 
orre  in  the  other  has  long  been  recognised  as  the  only  sure  way 
of  maintaining  such  parity.  Tlie  ability  of  the  Secretary  of 
the  Treasury  to  pay  out  gold  in  exchange  for  silver  depends, 
of  course,  upon  the  limitation  of  the  amount  of  the  latter  that 
is  put  into  circulation.  As  the  law  now  stands,  no  more  new 
silver  dollars  may  be  coined  than  will  suffice  to  redeem  the 
$19,000,000  in  Treasury  notes  still  outstanding,  and  there  is 
little  doubt  that  the  quantity  thus  authorised,  circulating  for 
the  most  part  as  silver  certificates,  will  be  continuously  needed 
for  the  country's  retail  trade.  So  long  as  this  limitation  is 
adhered  to,  the  redemption  of  silver  dollars  is  not  likely  to 
cause  the  Government  any  embarrassment.  Minor  coins  are 
kept  at  a  parity  with  gold  because  they  also  are  redeemable  in 
standard  coin,  and  because  there  is  a  constant  demand  for  the 
limited  quantity  of  such  coins  issued. 

The   United  States  notes  and  the  Treasury  notes  of  1890,  History  of 
although  so  different  in  their  origin,  are  now  on  the  same  foot-  staters 
ing  so  far  as  their  monetary  use  is  concerned.    Both  are  a  legal  Notes 
tender  and  both  are  now  redeemable  in  gold.  The  United  States 
notes  or  greenbacks,  which  were  issued  in  excess  during  the 
Civil  War,  were  restored  to  a  parity  with  gold  by  the  resump- 
tion of  specie  payments,  January  i,  1879.     The  amount  of  this 
currency,  which  was  at  one  time  nearly  $450,000,000,  had  been 
reduced  to  $346,681,016  by  May  31,  1878,  when  an  act,  which 
is  still  in  force,  requiring  this  quantity  to  be  kept  in  circulation, 
became  effective. 

After    1890,   when   the   excessive   issue   of   silver   currency  The  Gold 
threatened  to  deplete  the  country  of  its  gold,  the  United  States      ^^^'"^'^ 
notes  were  the  convenient  means  used  bv  bankers  to  secure 


National 
Bank  Notes 


Stability  of 
the  Gold 
Standard 


The 

Limping 

Standard 


316       Money  and  the  Monetary  System 

that  metal  from  the  Treasury.  As,  at  the  same  period,  the  Gov- 
ernment's revenues  were  insufficient  to  meet  its  current  require- 
ments, the  Secretary  of  the  Treasury  was  compelled  to  pay  out 
the  notes  almost  as  fast  as  they  were  redeemed,  and  this  permit- 
ted their  repeated  use  for  the  same  purpose.  The  act  of  March 
14,  1900,  was  designed  to  prevent  the  recurrence  of  a  similar 
situation.  It  provides  for  a  special  gold  reserve  of  $150,000,000 
to  be  set  aside  by  the  Secretary  of  the  Treasury  for  the  exclu- 
sive purpose  of  redeeming  on  demand  United  States  notes 
and  Treasury  notes.  The  redeemed  notes  are  to  be  used  only 
to  maintain  the  gold  reserve  either  through  exchanges  for  free 
gold  already  in  the  Treasury  or  through  the  purchase  of  gold 
bullion  "  at  such  rates  and  upon  such  terms  as  may  be  deemed 
most  advantageous  to  the  public  interest."  The  law  provides 
further  that  when  the  gold  reserve  falls  below  $100,000,000 
the  Secretary  of  the  Treasury  shall  restore  it  to  $150,000,000 
by  borrowing  money  at  3  per  cent,  or  less  on  the  credit  of  the 
United  States.  The  redemption  of  these  two  forms  of  money 
in  gold  is  thus  assured  so  long  as  the  credit  of  the  United 
States  Government  is  not  itself  impaired. 

The  national  bank  notes,  the  last  variety  of  money  to  be 
considered,  are  kept  at  a  parity  with  gold  by  being  made 
redeemable  in  legal  money  either  at  the  Treasury  or  over  the 
counter  of  the  issuing  bank. 

As  a  result  of  these  various  expedients,  all  of  which  reduce 
to  the  ready  convertibility  of  the  token  or  credit  money  con- 
cerned into  gold  coin,  all  kinds  of  money  in  circulation  in  the 
United  States  are  kept  at  a  parity,  and  the  gold  standard  is 
maintained.  So  long  as  the  issue  of  token  and  credit  money  is 
restricted  within  its  present  limits  there  seems  little  ground 
for  anxiety  in  regard  to  the  stability  of  the  standard. 

§  177.  The  monetary  system  of  the  United  States  has  been 
styled  the  "  limping  standard  "  because  it  includes  with  stand- 
ard, token,  and  credit  money,  silver  dollars,  wdiich  are  full  legal 
tender,  although  they  are  not  by  express  law  redeemable  in 
standard  gold  coin,  as  are  the  Treasury  notes  and  greenbacks. 
At  the  present  time  there  are  in  round  numbers  500,000,000  of 
these  silver  dollars  for  which  the  country  has  no  use  in  its 
medium  of  exchange.     These  seem  to  serxe  a  monetary  use 


The  Silver  Hoard  317 

through  the  silver  certificates  which  circulate  in  their  stearl.  but, 
as  a  matter  of  fact,  the  latter  owe  their  currency  not  to  the  silver 
dollars  which  they  represent  and  which  nobody  wants,  but  to 
their  convenience  for  use  in  retail  trade  and  to  the  general 
belief  that  rather  than  have  them  depreciate,  the  Government 
will  redeem  them  in  gold  in  the  same  way  that  it  redeems  its 
other  forms  of  paper  money.  The  silver  dollars  themselves  are 
a  dead  asset  piled  up  in  the  vaults  of  the  Treasury  at  Washing- 
ton, as  useless  to  the  Government  and  to  the  country  as  would 
be  a  similar  accumulation  of  aluminum  or  copper.  What  to  do 
Avith  these  silver  dollars  is  a  problem  which  threatens  to  embar- 
rass the  Government  more  and  more  as  the  country  becomes 
Hiore  firmly  attached  to  the  gold  standard. 

At  the  price  (53  cents  an  ounce)  which  prevailed  July  i,  1903  The  Silver 
the  500,000,000  odd  silver  dollars  which  constitute  the  Gov-  ^^^^^^ 
ernment's  hoard  were  worth,  as  bullion,  about  $200,000,000.  It 
can  hardly  be  doubted  that  the  stability  of  the  country's  mone- 
tary system  would  be  increased  if  this  amount  in  gold  could  be 
substituted  for  these  surplus  silver  dollars  and  the  $500,000,000 
odd  of  silver  certificates  in  circulation  could  be  converted  into 
an  out-and-out  credit  currency  like  the  United  States  notes.  A 
gold  reserve  of  $350,000,000  would  then  be  available  to  main- 
tain a  credit  currency  equal  to  about  $850,000,000. 

But  there  are  two  objections  to  this  course.  The  "  friends  Objectious 
of  silver,"  who  must  still  be  reckoned  with  as  a  political  factor  silve/  ^ 
of  no  mean  importance,  would  oppose  bitterly  any  attempt  to  Dollars 
dispose  of  the  nation's  silver  as  bullion  on  the  ground  that  this 
would  still  further  depress  the  price  of  that  metal  at  the  same 
time  that  it  tended  to  enhance  the  value  of  gold.  When  it  is 
recalled  that  the  world's  annual  output  of  silver  is  only  about 
175,000,000  ounces,  the  demoralising  consequences  that  would 
follow  the  sudden  offer  for  sale  of  nearly  387,000,000  ounces 
will  be  appreciated.  Clearly,  any  such  policy  must  be  carried 
out  gradually  if  the  Government  is  to  realise  any  considerable 
return  from  its  sales  of  silver  bullion.  The  other  objection  is 
urged  by  extreme  advocates  of  the  gold  standard,  who  depre- 
cate the  use  of  any  money  other  than  standard  coin  or  certifi- 
cates based  upon  a  dollar  for  dollar  reserv^e  of  such  coin,  beyond 
the  token  money   required   for  small  change.      Such  writers 


The 

Function 
of  Token 
Money 


318       Money  and  the  Monetary  System 

have  long  urged  the  retirement  of  the  United  States  notes  al- 
ready in  circulation  and  would  look  upon  the  suggested  addition 
to  these  notes,  even  though  coupled  with  a  proportionate 
strengthening  of  the  gold  reserve,  as  an  imprudent  innovation. 
To  do  justice  to  this  latter  objection  it  will  be  necessarv  to 
consider  the  whole  question  of  the  proper  place  of  token  and 
credit  money  in  a  well-ordered  monetary  system. 

§  178.  The  function  of  token  money  in  connection  with  the 
gold  standard  is  readily  understood.  Owing  to  their  small  size 
in  proportion  to  their  value,  gold  coins  are  not  suitable  for  small 
change.  The  experience  of  the  United  States  has  demonstrated 
that  even  the  gold  dollar  is  too  small  to  be  a  convenient  coin 
and  its  coinage  was  suspended  in  1890,  leaving  the  quarter 
eagle  ($2.50)  as  the  smallest  gold  coin  in  circulation.  The  ex- 
perience of  other  countries  has  led  to  similar  conclusions.  Thus 
the  smallest  gold  coin  of  Great  Britain  is  the  half-sovereign 
($2.50),  of  Germany,  the  five-mark  piece  ($1.25),  and  of 
France,  the  five-franc  piece  ($1.00).  Token  money  is  resorted 
to  to  supply  gold-standard  countries  with  convenient  coins  of 
the  small  denominations  required  in  retail  trade.  The  experi- 
ence of  each  countr}^  must  determine  what  token  coins  best  suit 
the  convenience  of  its  business  public,  but  there  are  certain  prin- 
ciples that  may  be  laid  down  which  are  of  general  application : 
( I )  The  issue  of  token  money  should  be  limited  to  the  actual 
requirements  of  retail  trade,  and  to  insure  this  result  and  the 
maintenance  of  the  parity  between  token  and  standard  money, 
the  law  should  provide  for  the  ready  convertibility  of  one  into 
the  other.  (2)  Since  the  value  of  token  money  depends  upon 
the  demand  for  it  and  upon  its  ready  convertibility,  the  value 
of  the  bullion  contents  of  such  money  is  of  slight  importance  in 
comparison  with  its  being  readily  cognisable  and  convenient  in 
size  and  weight.  In  fact,  the  only  good  reason  for  having  the 
face  value  of  token  coins  bear  a  certain  relation  ,to  the  value  of 
tlie  bullion  they  contain,  plus  the  expense  of  their  manufac- 
ture, is  that  this  is  the  easiest  way  to  prevent  counterfeiting.  A 
serious  objection  to  the  silver  dollars  of  the  United  States 
regarded  as  token  money  is  that  their  silver  contents  are  now 
worth  so  little  in  comparison  with  their  coin  value  that  a 
handsome  profit  might  be  made  by  manufacturing  silver  dollars 


The  Function  of  Credit  Money  319 

of  standard  weight  and  fineness  and  in  every  respect  as  good 

as   those   manufactured   by   the   United    States.     This   offers 

entirely  too  attractive  a  field  for  the  ingenuity  and  daring  of 

counterfeiters.     (3)   On  the  other  hand,  the  margin  between 

the  bullion  and  coin  value  of  token  coins  should  be  wide  enough 

to  allow  for  considerable  variations  in  the  former.     Only  in 

this  way  is  it  possible  to  avoid  the  danger  that  the  bullion 

value  of  such  coins  shall  come  to  exceed  their  coin  value,  with 

the  result  that  they  will  be  withdrawn  from  circulation. 

The  token-money  system  of  the  United  States,  except  as  Token 

regards  the  excessive  coinage  of  silver  dollars,  conforms  fairly  Money  of 

„  ,        ,  .      .    ,  „,  .  .,  .       .  ,      -^    the  United 

well  to  the  above  pnnciples.     1  he  mmor  silver  coins  issued  are  states 

the  half-dollar,  the  quarter,  and  the  dime.  These  are  a  legal 
tender  in  payments  of  ten  dollars  or  less  and,  as  already  ex- 
plained, are  redeemable  in  standard  money  at  the  pleasure  of 
the  holder.  The  other  coins  issued  are  the  nickel  five-cent 
piece  and  the  copper  cent,  which  are  a  legal  tender  in  payments 
of  twenty-five  cents  or  less,  and  likewise  redeemable  in  amounts 
of  twenty  dollars  or  multiples  thereof.  The  most  striking  dif- 
ference between  this  system  and  those  of  European  countries  is 
the  relatively  high  value  of  the  coin  of  lowest  denomination 
which  it  includes.  The  smallest  coin  of  Great  Britain  is  the 
farthing  (i/4  cent),  of  Germany,  the  pfennig  (}^  cent),  and  of 
France,  the  centime  (Vs  cent).  Except  for  this  possible  defect, 
the  American  system  appears  to  meet  all  the  requirements  of 
the  country's  retail  trade. 

§   179.  Credit  money,  in  distinction  from  the  small  change  The 
that  we  have  called  token  money  (which  is,  of  course,  small-  ^"^p^^'^-^ 
change  credit  money),  is  justified  not  on  the  ground  that  it  adds  Money 
to  the  convenience  of  the  medium  of  exchange,  but  that  it  is 
economical.    Thus  the  United  States  notes  in  the  monetary  sys- 
tem of  the  United  States  are  no  more  convenient  than  gold  cer- 
tificates, and  their  retirement  through  the  substitution  for  them 
of  gold  and  gold-secured  certificates  would  not  impair  in  the 
least  the  efficiency  of  the  country's  medium  of  exchange.    The 
objection  to  such  a  policy  is  that  it  would  entail  useless  expense 
upon  the  Government  and  would  tie  up  many  millions  of  the 
world's  gold  for  a  purpose  which  credit  money  serves  as  well. 
The  latter,  when  issued  in  the  form  of  paper  notes,  is  as  accept- 


Objection.' 
to  Cr3dit 
Money 


320       Money  and  the  Monetary  System 

able  to  the  business  community  as  any  other  form  of  money,  so 
long  as  its  ready  convertibility  into  standard  coin  is  assured. 
This  convertibility  can  be  maintained  by  means  of  a  gold 
reserve  equal  to  only  one-half,  one-third,  or  even,  in  the  opinion 
of  some  w^riters,  one-fourth  of  the  credit  money  in  circulation. 
Such  a  small  reserve  is  adequate  to  the  purpose  because,  in 
practice,  gold  itself  is  a  very  awkward  medium  of  exchange. 
It  is  required  only  as  a  means  of  making  payments  abroad,  for 
use  as  bullion,  or  as  a  special  reserve  by  private  credit  institu- 
tions, and  these  combined  uses  call  ordinarily  for  but  a  small 
amount  of  gold  coin  in  comparison  with  the  total  mone- 
tary needs  of  a  country.  When  gold  is  required  credit 
money  may  be  presented  to  the  Government  for  redemption. 
If  this  credit  money  is  withheld  from  circulation  until  it  can 
be  exchanged  again  for  gold,  to  be  added  to  the  gold  reserve, 
and  if  the  public  treasury  is  empowered,  as  is  the  Treasury 
of  the  United  States,  to  borrow  money  (i.  e.,  gold)  on  the 
public  credit  to  replenish  the  gold  reserve  whenever  it  is 
I  educed  below  a  certain  point,  there  seems  every  reason  to 
believe  that  the  convertibility  of  a  moderate  amount  of  credit 
money,  say,  one-half  of  the  money  in  general  circulation,  could 
be  maintained  in  the  face  of  any  emergency.  It  is  equally  clear 
tliat  such  a  system,  if  operated  in  a  way  that  commanded  full 
public  confidence,  would  efifect  a  considerable  saving.  The 
credit  money  in  circulation  over  and  above  the  gold  held  in  the 
gold  reserve  represents  virtually  so  much  gold  saved  to  the 
country  and  to  the  world.  So  long  as  gold  is  a  highly  valuable 
commodity,  serving  a  great  variety  of  uses  besides  that  of 
money,  this  saving  is  a  matter  of  no  slight  importance. 

The  case  of  the  opponents  of  credit  money  rests,  not  on  a 
denial  of  the  economy  of  such  a  system,  so  long  as  it  com- 
mands full  public  confidence,  but  on  the  conviction  that  modern 
governments  are  not  yet  developed  to  a  point  where  they  can 
manage  such  a  delicate  device  as  credit  money  in  a  way  to  retain 
public  confidence.  Back  of  credit  money  is  the  elaborate  ma- 
chinery of  commercial  credit,  to  be  discussed  in  the  next  chap- 
ter, and  in  comparison  with  the  losses  that  would  follow  any 
disturbance  of  this  credit  in  consequence  of  a  distrust  of  the 
essential   soundness  of  the  monetary  system,  the  economies 


Conclusion  321 

traceable  to  credit  money  itself  may  properly  be  described  as 
petty  and  unworthy  of  serious  consideration. 

The  recent  history  of  the  United  States  furnishes  abundant  Credit 
material  in  support  of  this  distrust  of  the  ability  of  a  demo-  the'unUed 
cratic  government  to  maintain  a  credit  money  system  that  will  States 
be  above  suspicion.  In  interpreting  this  history,  it  must  not  be 
forgotten,  however,  that  the  credit  money  system  was  never 
deliberately  adopted.  When  the  United  States  notes  were 
issued  during  the  Civil  War  it  was  with  no  intention  of  add- 
ing them  permanently  to  the  circulating  medium.  The  act  which 
accomplished  that  purpose  (1878)  was  passed  as  a  compromise 
between  those  who  favoured  an  out-and-out  fiat  standard  and 
those  who  desired  to  see  all  paper  money  withdrawn  from 
circulation ;  and  neither  side  has  ever  been  entirely  satisfied 
with  the  arrangement.  In  the  same  way  the  Bland-Allison  Act 
was  a  compromise  between  those  who  desired  the  free  coinage 
of  silver,  and  who  in  1878  controlled  a  majority  of  the  votes 
in  the  House  of  Representatives,  and  those  who  preferred  to 
have  the  use  of  silver  confined  to  small  change.  Twelve  years 
later  the  matured  strength  of  the  advocates  of  free  coinage 
forced  Congress  as  a  further  compromise  to  pass  the  Sherman 
Act,  which  was  only  prevented,  through  its  repeal  by  a  reluc- 
tant Congress  in  1893,  from  so  inflating  the  currency  wath 
Treasury  notes  and  silver  dollars  as  to  drive  gold  out  of  circu- 
lation and  debase  the  standard.  During  this  period  the  Gov- 
ernment was  forced  four  dififerent  times  to  issue  bonds  on 
imfavourable  terms  to  maintain  the  standard,  and  although  it 
succeeded  in  this  object,  the  distrust  engendered  w^as  probably 
the  chief  cause  of  the  crisis  and  subsequent  depression  from 
which  the  country  suffered  from  1893  to  1897. 

Little  favourable  as  is  the  above  recital  to  the  system  of  Conclusion 
credit  money,  it  is  believed  that  this  very  experience  has  taught 
the  country  a  lesson  that  it  will  not  soon  forget  and  that  there 
is  little  danger  of  a  repetition  of  similar  occurrences.  As  oppo- 
sition to  the  gold  standard  itself  loses  its  force,  as  it  bids  fair 
to  do,  the  gold  reserve  necessary  to  the  maintenance  of  that 
standard  and  of  a  large  volume  of  credit  money  will,  it  is  be- 
lieved, be  accepted  by  all  parties  as  a  necessity.  Although 
fully  impressed  with  the  unwisdom  of  endangering  the  sound- 


322       Money  and  the  Monetary  System 

ness  of  the  monetary  system  for  the  sake  of  the  petty  economy 
resulting  from  the  use  of  credit  money,  the  author  beheves 
that  general  enlightenment  on  the  money  question  has  advanced 
so  far  that  a  country  like  the  United  States  can  make  moderate 
use  of  credit  money  with  perfect  safety.  He  would  even  go  to 
the  length  of  advocating  the  gradual  substitution  of  United 
States  notes  for  the  silver  certificates  now  in  circulation  and 
the  gradual  liquidation  of  the  Government's  hoard  of  silver  in 
exchange  for  gold  to  be  added  to  the  gold  reserve.  The 
soundness  of  the  monetary  system  of  the  country  would,  in  his 
opinion,  be  materially  increased  if,  for  the  500,000,000  surplus 
silver  dollars  now  stored  at  Washington,  $200,000,000  in  gold 
were  added  to  the  gold  reserve  as  a  redemption  fund  for  the 
$500,000,000  in  demand  notes  which  might  be  substituted  for 
the  outstanding  silver  certificates.  Whether  the  gold  standard 
supplemented  by  as  niuch  token  money  as  the  business  com- 
munity needs  and  as  much  credit  money  as  the  Government 
can  safely  maintain,  is  the  best  monetary  system  for  a  country 
like  the  United  States  is  one  of  the  "  unsettled  monetary 
problems,"  the  discussion  of  which  is  postponed  until  some 
attention  has  been  given  to  the  subjects  of  "  credit  and 
banking." 

REFERENCES  FOR   COLLATERAL   READING 

Among  the  older  works  on  money,  the  best  are:  */evons.  Money  and 
the  Mechanism  of  Exchange  ;  Walker,  Money  in  Its  Relation  to 
Tradeand  Industry,  and  *  Nicholson,  Money  and  Monetary  Problems. 
The  most  important  recent  works  on  the  subject  are:  *  White, 
Money  and  Banking  ;  Scott,  Money  and  Banking  (good  bibliog- 
raphy); LaughliUy  The  Principles  of  Money;  *K!nley,  Money 
and  Credit;  *Johnson,  Money  and  Currency.  More  condensed 
discussions  of  the  subject  will  be  found  in  *Hadley,  Economics, 
Chap.  VII.,  and  *Pierson,  Principles  of  Economics,  Part  II. 
Treating  more  especially  of  the  monetary  history  of  the  United 
States  are:  Laughlin,  The  History  of  Bimetallism  in  the  United 
States;  *  Dewey,  The  Financial  History  of  the  United  States ; 
Dtifidar,  Laws  of  the  United  vStates  Relating  to  Currency,  Finance, 
and  Banking,  1789  to  iSqt  ;  Report  of  the  Indianapolis  Monetary 
Commission  (1898),  and  Noyes,  Thirty  Years  of  American  Finance. 


CHAPTER  XVIII 
CREDIT   AND   BANKING 

§  1 80.  Credit,  or  a  promise  to  pay  at  a  future  time  for  a  The 
valuable  consideration  received  in  the  present,  is  probably  as  old  q^I^^^ 
as  the  practice  of  exchange.  The  only  condition  essential  to  its 
use  is  confidence  on  the  part  of  the  creditor  that  the  promised 
payment  will  be  made  when  due,  and  this  must  have  been 
among  the  earliest  fruits  of  social  intercourse.  With  every 
increase  in  the  mutual  confidence  which  binds  together  the 
members  of  business  communities  a  larger  field  has  been 
opened  to  credit,  until  at  the  present  time  there  is  hardly  a 
business  man  who  does  not  figure  daily  either  as  a  creditor 
or  a  debtor  in  some  credit  transaction. 

With  the  introduction  of  money  as  the  medium  of  exchange, 
the  custom  arose  of  using  the  monetary  unit  as  the  medium  of 
credit,  or  of  deferred  payments.  This  is  now  so  universal  that 
little  or  no  exaggeration  is  involved  in  defining  credit  as  "'  a 
promise  to  pay  money."  The  written  forms  in  which  promises 
to  pay  money  are  drawn  up  are  conveniently  designated  as 
"  credit  instruments  "  or  "  credit  paper." 

Like  most  of  the  terms  of  economics,  "  credit  "  is  used  in 
other  senses  than  that  chosen  for  definition.  Business  men  talk 
habitually  of  "  having  credit  "  and  of  "  giving  credit."  To 
have  credit  is  to  enjoy  a  reputation  for  integrity  which  in- 
spires confidence  or  to  possess  property  that  may  be  pledged. 
To  give  credit,  on  the  other  hand,  is  to  accept  another's  promise 
to  pay  in  exchange  for  a  valuable  consideration.  It  is  ob- 
vious that  business  men  will  "  give  credit  "  only  to  those  who 
"  have  "  it  and  that  both  are  necessary  to  the  existence  of 
negotiable  credit  instruments. 

§  181.  Of  all  forms  of  credit  the  simplest  is  verbal  or  book  Book  Credit 
credit,  resorted  to  whenever  a  purchaser  has  things  "  charged." 
This   practice   has   many   advantages.     In    agricultural   com- 

323 


324  Credit  and  Banking 

munities  in  which  incomes  are  received  only  at  long  interv^als 
when  the  crops  are  ready  for  sale,  book  credit  at  the  country 
store  enables  the  farmer  to  secure  supplies  for  himself  and  his 
family  during  the  periods  between  harvests.  Without  it  and 
vi^ithout  capital  of  their  own,  farmers  in  many  sections  would 
be  unable  to  make  a  living.  In  factory  towns  and  cities  where 
wages  are  paid  by  the  month, book  credit  is  indispensable  to  the 
maintenance  of  many  workingmen's  families.  It  would  be 
better,  doubtless,  if  wage-earners  would  save  enough  to  be  able 
to  live  on  the  earnings  of  the  previous  rather  than  of  the  current 
month,  but  as  yet  there  are  few  places  in  which  many  persons 
in  this  class  do  not  resort  regularly  to  credit  for  some  of  their 
purchases  before  the  advent  of  pay  day.  More  important,  be- 
cause more  clearly  beneficial,  is  the  use  of  book  credit  in  con- 
nection with  large  retail  stores  where  it  obviates  the  necessity 
for  small  payments.  If  every  purchase  made  in  a  day  in  a  city 
department  store  were  paid  for  in  money  on  the  spot,  twice  as 
many  clerks  would  be  needed,  and  customers  would  be  kept 
waiting  four  or  five  times  as  long  as  is  now  necessary.  In  fact 
it  is  doubtful  whether  well-to-do  customers  could  be  retained 
by  a  large  store  which  insisted  on  doing  all  its  business  on  a 
cash  basis,  and  it  is  certain  that  the  prices  charged  would  have 
to  be  materially  lower  than  in  other  stores  to  compensate  for  the 
disadvantages  of  the  system.  The  extent  to  which  book  credit 
serves  as  a  medium  of  exchange  in  the  United  States  can  only 
be  guessed  at,  but  it  is  believed  that  it  figures  in  connection 
with  fully  one-half  of  the  wholesale  and  retail  transactions  that 
take  place. 

In  agricultural  districts  it  is  not  unusual  for  the  merchants 
who  sell  on  credit  to  be  themselves  purchasers  of  their  cus- 
tomers' products.  Where  this  is  the  case  debts  contracted  dur- 
ing the  year  may  be  cancelled  by  credits  secured  when  the  crops 
are  sold  and  book  credit  may  serve  as  the  sole  medium  of  ex- 
change. More  commonly  the  use  of  book  credit  simply  defers 
payment  until  settlement  day,  when  some  other  medium  of  ex- 
change is  called  in  to  balance  the  account.  Generally  this  other 
medium  is  some  form  of  credit  created  by  a  bank,  such  as  a 
check  or  a  draft. 

§  182.  A  bank  is  an  institution  which  deals  in  money  and 


The  Banking  Business  325 

credit.  It  receives  deposits ;  pays  them  out  again  on  the  writ-  The 
ten  order  or  "  check  "  of  the  depositor ;  sells  "  drafts  "  or  ^^^'^^g 
orders  for  money  on  its  correspondents  in  other  places ;  lends 
at  interest  money,  deposit  credits,  or  its  own  "  bank  notes  " ; 
"  discounts  "  notes  and  bills  of  exchange ;  sells  "  foreign  ex- 
change "  or  drafts  on  its  correspondents  abroad,  and  sometimes 
provides  safety-deposit  boxes  for  the  storage  of  valuables.  In 
addition  to  commercial  banks,  like  the  national  banks  in  the 
United  States,  to  which  the  above  description  applies,  there  are 
other  banking  institutions  which  perform  only  a  limited  num- 
ber of  these  functions  and  combine  with  them  others  that  do 
not  fall  strictly  within  the  field  of  banking.  Such  are  savings 
banks  and  trust  companies. 

Historically,  lending  is  an  older  banking  function  than  bor-  Based  on 
rowing.  Thus  the  Bank  of  England  was  incorporated  in  1693  Confidence 
primarily  for  the  purpose  of  lending  to  the  Government 
£2,000,000 at  8  per  cent,  interest.  The  capital  necessary  to  carry 
through  this  operation  was  subscribed  by  merchants  of  London, 
who  soon  fell  into  the  habit  of  entrusting  their  surplus  funds 
to  the  bank  and  of  borrowing  from  it  themselves  when  occasion 
required.  As  the  deposits  of  a  commercial  bank  must  be  repaid 
on  demand,  the  practice  of  lending  the  deposits  as  well  as  the 
capital  of  a  bank  was  at  first  looked  upon  as  a  dangerous  inno- 
vation. Experience  has  shown,  however,  that  although  all  de- 
positors have  the  right  to  withdraw  their  deposits  on  any  given 
day,  in  practice  only  a  small  portion  of  them  will  do  so.  By 
lending  money  for  short  periods  and  arranging  loans  so  that 
a  certain  proportion  of  them  become  due  each  day,  a  modern 
bank  is  able  to  lend  at  interest  from  two-thirds  to  three-fourths 
of  its  deposits  without  running  any  serious  risk  of  becoming 
bankrupt.  Of  course,  to  continue  this  policy,  it  is  necessary 
for  a  bank  to  command  the  confidence  of  its  depositors.  If 
they  are  suspicious  or  timid,  some  slight  circumstance  may 
start  a  "  run  on  the  bank,"  which  may  prove  fatal,  since  no 
bank  can  do  a  profitable  business  and  at  the  same  time  be  in 
a  position  to  repay  at  any  time  all  of  its  depositors.  Banking 
thus  depends  for  its  success  more  than  any  other  business  upon 
the  confidence  which  customers  have  in  those  directing  the 
enterprise.     It  is  this  confidence  that  attracts  deposits.     The 


326  Credit  and  Banking 

same  confidence  holds  them  after  they  have  been  made  and 
enables  the  bank  to  turn  them  to  profitable  account.  The  con- 
fidence of  other  banks,  finally,  may  preserve  a  bank  subjected 
to  a  run  from  becoming  insolvent.  For  these  reasons  bankers 
should  be  men  of  tried  business  experience,  whose  integrity 
is  above  suspicion. 

The  Check         §  jg^    One  reason  why  a  bank  may  count  with  confidence  on 
System  .    .  .  . 

retammg  control  over  the  major  portion  of  its  deposits  from 

day  to  day,  is  because  the  check  is  such  a  convenient  means 
of  payment  that  it  tends  to  become  the  principal  medium  of 
exchange  in  communities  in  which  banking  is  developed.  If 
all  of  the  inhabitants  of  a  town  had  deposits  in  the  same  bank, 
It  will  readily  be  perceived  that  payments  between  them  might 
be  made  exclusively  by  means  of  checks  and  that  such  payments 
need  involve  the  actual  withdrawal  of  no  money  from  the 
bank.  The  butcher,  the  grocer,  the  dry-goods  merchant,  the 
lawyer,  the  physician,  etc.,  might  exchange  checks  at  the  end 
of  each  week  or  month,  and  these  transfers  could  be  noted  on 
the  books  of  the  bank.  No  money  would  be  required,  because 
under  the  assumed  conditions  checks  would  accomplish  all  of 
the  exchange  work  to  be  done.  Only  when  payments  to  per- 
sons who  were  not  depositors  in  the  bank  were  made  would 
the  bank's  deposits  be  encroached  upon.  No  community  has  yet 
developed  to  a  point  where  checks  are  used  for  all  of  its  trans- 
actions. In  fact,  for  small  payments,  the  convenience  of  using 
checks  is  more  than  counterbalanced  by  the  expense  connected 
with  transferring  small  amounts  from  one  account  to  another. 
Moreover,  as  a  community  grows,  competing  banks  are  likely 
to  start  up,  and  this  gives  rise  to  checks  drawn  on  dififerent 
banks  and  prevents  that  easy  transfer  of  accounts  possible 
when  one  bank  monopolises  the  business.  To  reduce  to  a 
minimum  the  transfers  of  money  necessitated  by  the  existence 
of  different  banks  in  the  same  locality,  the  banks  themselves 
have  devised  what  is  known  as  the  "  clearing  house."  Where 
no  clearing  house  exists,  each  bank  which  receives  checks 
drawn  on  other  banks  is  under  the  necessity  of  sending  such 
checks  by  special  messenger  to  the  banks  against  which  they 
are  drawn  and  demanding  payment  for  them.  A  clearing 
house  is  an  institution  where  such  messengers  from  different 


Checks  and  Drafts  327 

banks  may  come  together  daily  and  exchange  checks,  receiving" 
in  payment  only  the  balance  due  to  each  bank  from  all  of  the 
others  belonging  to  the  clearing  house.  By  this  means  checks 
aggregating  millions  of  dollars  may  be  exchanged  through  the 
transfer  of  only  5  or  6  per  cent,  of  the  amount  in  money.  Even 
this  transfer  involves  no  actual  reduction  in  the  amount  of 
money  on  deposit,  since  some  banks  gain  what  others  lose. 
Thus,  with  a  w^cll-organised  clearing  house,  the  affiliated  banks 
in  a  city  in  which  checks  are  the  preferred  means  of  payment 
may  count  with  certainty  on  retaining  control  over  the  greater 
part  of  their  deposits,  so  long  as  they  continue  to  command 
the  confidence  of  their  depositors. 

In  the  United  States  the  use  of  checks  for  paying  debts  in  Checks 
distant  cities  is  becoming  almost  as  general  as  for  paying  debts  ^°  ^^  ^ 
at  home.  To  facilitate  this  process  each  bank  has  its  corre- 
spondent in  each  of  the  large  cities  of  the  country,  to  which 
it  sends  checks  drawn  on  banks  in  those  cities  which  it  has 
received  on  deposit  or  cashed  for  its  customers.  These  checks 
are  sent  to  the  clearing  house  like  any  others  by  the  bank 
receiving  them,  and,  if  good,  are  credited  to  the  account  of  the 
bank  making  the  remittance.  The  process  is  made  still  sim.pler 
by  the  use  of  drafts  drawn  by  the  customer's  bank  against  its 
correspondent  in  the  city  to  which  remittance  is  made  and 
given  in  exchange  for  checks  against  the  customer's  deposit. 
The  obvious  advantage  of  drafts  for  distant  payments  is  that 
they  do  not  need  to  be  returned  to  the  place  wdiere  they  orig- 
inate before  they  are  paid  and  cancelled. 

The  use  of  checks,  drafts,  and  post-office,  express,  and  tele-  Money 
graph  money  orders  as  media  of  exchange  confines  the  use  of  ''^"^^  Credit 
money  in  progressive  communities  within  very  narrow  limits. 
Well-to-do  people  in  cities  in  the  United  States  already  use 
money  only  for  small-change  transactions  and  for  travelling 
expenses.  As  the  country  becomes  more  densely  inhabited  and 
credit  institutions  are  perfected,  it  hardly  admits  of  question 
that  this  custom  will  become  more  general  and  that  credit  will 
serve  as  the  medium  for  an  ever  larger  proportion  of  exchange 
transactions.  This  does  not  mean  that  the  monetarv  unit  will 
lose  its  importance  as  the  standard  of  value,  since  all  credit 
instruments  are  expressed  in  terms  of  money.     In  fact,  since 


28 


Credit  and  Banking 


Importance 
of  Deposits 
10  Banks 


Forms 
of  Bank 
Loans 


credit  is  based  on  confidence,  the  wider  the  extension  of  credit, 
the  more  vitally  important  will  the  soundness  and  stability  of 
the  monetary  system  become. 

§  184.  Lending,  which  was  the  first,  is  still,  from  the  point 
of  view  of  the  banker,  the  most  important  function  of  a  bank. 
He  is  willing  to  accept  deposits  and  to  maintain  the  clerical 
force  necessary  to  the  efficient  operation  of  the  check  system, 
because  in  this  way  he  adds  to  his  loanable  resources.  It  is 
through  lending  the  latter  at  interest  that  he  derives  the  greater 
part  of  his  profit.  Lending  deposits  is  so  remunerative  that 
banks,  especially  in  cities,  are  active  competitors  for  deposit- 
ors. The  inducements  they  offer  range  from  ready  accommo- 
dation with  loans,  which  appeals  especially  to  active  entrepren- 
eurs, to  the  payment  of  a  small  rate  of  interest  even  on  call 
deposits.  Some  city  banks  even  go  so  far  as  to  send  their 
own  messengers  to  collect  deposits  and  to  cash  checks  for  their 
customers,  so  that  the  latter  are  spared  the  trouble  of  visiting 
the  bank.  One  reason  for  this  active  competition  is  the  belief 
that  deposits  themselves  attract  and  hold  deposits.  Confi- 
dence is  infectious,  and  when  a  business  man  observes  that 
others  are  entrusting  millions  of  dollars  to  a  particular 
bank  he  is  the  more  ready  to  entrust  to  it  his  own  surplus 
funds. 

A  bank's  loans  may  assume  a  variety  of  forms  depending 
upon  the  kind  of  security  accepted  and  the  conditions  as  to 
interest.  The  simplest  sort  of  a  loan  is  on  the  personal  note 
of  the  borrower,  secured  only  by  his  individual  name.  Such 
notes  are  known  as  "  single-name  paper  "  and  are  entirely 
acceptable  to  bankers  when  the  credit  of  the  giver  of  the  note 
is  above  question.  A  more  common  kind  of  Loan  is  on  the  per- 
sonal note  of  the  borrower  endorsed  by  some  friend  or  busi- 
ness associate,  who,  by  writing  his  name  on  the  note,  makes  him- 
self also  liable  for  the  payment  of  the  obligation.  "  Two-name 
paper  "  is,  for  obvious  reasons,  more  acceptable  than  single- 
name  notes.  Endorsements  on  notes  may  be  multiplied  indef- 
initely, and  each  new  name  adds  something  to  the  value  of  the 
security. 

Even  more  acceptable  to  bankers  than  personal  notes  are 
notes  secured  by  a  pledge  of  stocks  or  bonds,  called  in  this 


Call  and  Time  Loans       329 

connection  "  collateral."  If  such  notes  are  not  paid  when  they 
fall  due  the  banker  is  at  liberty  to  sell  the  securities  pledged 
and  reimburse  himself  for  principal  and  interest  from  the  pro- 
ceeds. To  lend  'ntelligently  on  collateral  security  the  banker 
must  be  well  informed  as  to  the  value  of  stocks  and  bonds,  and 
it  is  for  this  reason  that  he  is  compelled  to  follow  closely  the 
variations  of  the  stock  market.  In  addition  to  lending  on  paper 
created  for  the  purpose  of  the  loan,  banks  lend  by  discounting 
notes  and  bills  of  exchange  created  in  connection  with  ordinary 
mercantile  transactions.  A  bill  of  exchange  is  an  order  drawn 
by  one  person  directing  another  to  pay  a  certain  sum  of  money 
on  a  certain  date  to  a  third  person  named  in  the  bill.  Such  bills, 
or  drafts  (a  name  also  applied  to  them),  are  the  constant  re- 
course of  merchants  who  sell  on  credit.  When  drawn  by  a 
merchant  who  enjoys  the  confidence  of  his  bank  they  are  readily 
discounted  by  the  latter,  that  is,  purchased  at  their  face  value 
less  interest  on  the  principal  at  the  current  rate  to  the  time  when 
they  fall  due.  In  such  a  transaction  a  bank  virtually  lends  its 
customer  the  face  value  of  the  note  less  the  discount,  which  is 
in  this  case  the  interest,  relying  upon  him  to  reimburse  it  if  the 
person  against  whom  the  bill  is  drawn  fails  to  pay.  To  avoid 
misunderstanding,  banks  which  discount  bills  of  exchange 
usually  lose  no  time  in  having  them  brought  to  the  attention  of 
the  persons  against  whom  they  are  drawn  for  their  "  accept- 
ance." An  accepted  bill  resembles  an  endorsed  note  in  that  two 
persons  are  legally  responsible  for  its  payment. 

Besides  differing  in  their  form,  bank  loans  differ  as  to  the  Call  and 
conditions  of  payment.  In  this  connection  "  call  "  or  demand  Loans 
loans,  short-time  loans,  and  long-time  loans  must  be  distin- 
guished. Call  loans  are  payable  at  any  time  at  the  will  of 
either  lender  or  borrower.  They  arc  based  usually  on  collateral 
security,  and  the  borrower  w'ho  fails  to  respond  promptly  to  a 
bank's  request  for  payment  runs  the  risk  of  being  "  sold  out," 
that  is,  of  having  the  security  sold  to  reimburse  the  bank.  As 
such  forced  sales  are  not  likely  to  be  advantageous,  borrower.* 
on  call  have  every  inducement  to  meet  their  obligations 
promptly.  Short-time  loans  are  loans  which  "  mature."  or  fall 
due,  within  thirty,  sixty,  or  ninety  days.  Next  to  call  loans, 
these  are  preferred  by  a  commercial  bank,  which  likes  to  have 


Banks 
Lend 

their  Credit 


By  Means 
of  Deposit 
Acconnts 


330  Credit  and  Banking 

its  resources  as  completely  under  control  at  any  given  time  as 
possible.  Long-time  loans  are  loans  that  run  for  six  months  or 
more  and  are  made  more  frequently  by  savings  banks,  trust 
companies,  and  private  bankers  whose  obligations  to  depositors 
do  not  usually  call  for  repayment  on  demand.  The  intelligent 
banker  makes  the  combination  of  these  various  kinds  of  loans 
that  will  secure  for  his  bank  the  largest  average  rate  of  return 
without  so  tying  up  its  funds  that  they  cannot  be  quickly  con- 
verted into  cash  to  meet  an  emergency. 

§  185.  From  what  has  been  said  thus  far,  it  might  be  inferred 
that  a  bank's  credit  figures  only  on  the  deposit  side  of  its  busi- 
ness. It  is  credit  that  attracts  depositors,  and  the  bank's  own 
capital  and  the  deposits  entrusted  to  it  appear  to  the  unini- 
tiated to  be  the  resources  which  limit  its  lending  capacity.  As 
a  matter  of  fact,  modern  banks  take  advantage  of  the  business 
community's  preference  for  checks  as  a  means  of  payment  to 
lend  deposit  credits  as  well  as  money.  The  present-day  bor- 
rower from  a  city  bank  desires,  in  nine  cases  out  of  ten,  not 
money,  but  a  deposit  credit  on  the  books  of  the  bank  against 
which  he  may  draw  checks  at  his  convenience.  Even  if  he 
wishes  to  pay  at  once  to  another  the  whole  amount  borrowed, 
he  will  usually  prefer  to  draw  a  check  for  it  rather  than  to  pay 
it  in  money.  From  this  it  follows  that  the  deposit  liabilities 
of  a  modern  city  bank  represent  quite  as  largely  sums  loaned 
by  it  to  business  men  as  sums  entrusted  to  it  by  such  men.  A 
bank  lends  its  credit  quite  as  freely  as  it  utilises  that  credit  in 
inducing  others  to  lend  to  it. 

The  same  considerations  which  cause  bona  fide  deposits  to 
be  left  under  the  control  of  the  bank,  so  long  as  it  retains  the 
confidence  of  its  customers,  causes  loaned  deposits  to  be  left 
with  it  also.  The  man  who  borrows  from  a  bank  wants  ordi- 
narily purchasing  power  to  use  m  some  business  transaction. 
This  purchasing  power  may  pass  to  someone  else,  but  under 
present  conditions  the  new  owner  is  almost  certain  to  entrust 
it,  at  least  temporarily,  to  a  bank  for  safe-keeping.  Presently 
his  business  dealings  may  cause  him  to  transfer  it,  or  a 
part  of  it,  to  a  third  person,  but  again  the  chances  are  all  in 
favour  of  its  being  left  on  deposit  with  a  bank  rather  than 
being  withdrawn  as  money.     Before  the  purchasing  power 


Bank  Loans  331 

loaned  by  the  bank  has  left  its  control,  or  the  control  of  affili- 
ated banks,  it  is  more  than  likely,  in  the  ordinary  course  of 
business,  that  the  loan  will  mature  and  equivalent  purchasing 
power  will  be  returned  to  the  bank.  In  this  fashion  a  bank  is 
able  to  receive  interest  for  assuming  demand  liabilities  which  it 
may  not, as  a  matter  of  fact, ever  be  called  upon  to  discharge.  It 
must  always  be  ready  to  discharge  them  on  pain  of  bankruptcy, 
but  it  may  count  with  confidence  on  being  called  upon  to  dis- 
charge only  a  portion  of  them  from  day  to  day.  This  ability  of 
a  bank  to  make  a  profit  by  lending  that  intangible  thing  called 
credit  is  what  makes  successful  banking  so  profitable  and  at 
the  same  time  exposes  bankers  to  such  serious  temptations. 
Banking  experience  in  a  given  locality  may  suggest  that  a  cash 
reserve  of  at  least  30  per  cent,  of  the  deposit  liabilities  ought  to 
be  held  in  readiness  to  satisfy  at  any  time  a  bank's  depositors. 
If  this  amount  is  held,  a  loan  business,  in  the  form  of  deposit 
liabilities,  of  $1,000,000  may  be  maintained  by  means  of  a 
reserve  of  $300,000.  The  same  $300,000  would  maintain  a  loan 
business  of  $1,200,000  if  2$  per  cent,  were  an  adequate  reserve. 
The  interest  on  the  additional  $200,000  is  the  temptation  which 
is  constantly  presented  to  the  banker  to  depart  from  the  lessons 
of  banking  experience  and  maintain  a  somewhat  smaller  reserve 
than  is  entirely  safe.  A  reserve  of  25  per  cent.,  20  per  cent., 
or  even  10  per  cent.,  might  be  adequate  under  ordinary  busi- 
ness conditions.  But  the  reserve  must  be  sufficient  to  meet 
not  only  ordinary  demands,  but  any  demands  that  are  likely  to 
arise.  It  is  because  bankers  are  apt  in  times  of  business  pros- 
perity to  forget  the  lessons  of  the  past  that  the  banking  busi- 
ness has  appeared  a  fit  object  for  state  supervision  and  regu- 
lation. 

Besides  lending  their  credit  in  the  form  of  deposit  liabilities,  Or  Bank 
banks  which  enjoy  the  privilege  of  issuing  bank  notes,  that  is, 
the  bank's  promises  to  pay  on  demand  without  interest  the 
sums  named  on  the  face  of  the  notes,  may  lend  their  credit 
in  this  form.  When  the  credit  of  a  bank  is  securely  estab- 
lished in  a  community  its  promises  to  pay  may  be  considered 
as  "  good  as  gold."  Under  such  circumstances  borrowers 
from  the  bank  will  be  as  willing  to  accept  bank  notes  as  legal 
money  in  case  they  wish  some  other  means  of  payment  than 


Interest 
oil  Bank 
Loans 


Paid 

for  Control 

over 

Capital 


Gold  Coin 
is  Capital 


332  Credit  and  Banking 

their  own  checks.  In  cities,  where  checks  can  be  presented  to 
the  bank  against  which  they  are  drawn  within  a  few  hours  and 
their  value  estabHshed,  most  business  men  prefer  them  to  bank 
notes.  In  country  districts,  however,  checks  are  not  acceptable 
because  of  the  risk  involved  in  trusting  the  drawer  of  a  check 
until  it  can  be  presented  at  the  bank  against  which  it  is  drawn. 
If  confidence  is  felt  in  the  bank,  no  such  objection  will  be 
raised  to  bank  notes,  since  they  carry  on  their  face  the  liability 
of  the  bank.  It  follows  that  country  banks  enjoying  the  privi- 
lege may  loan  their  credit  through  the  issue  of  bank  notes, 
when  otherwise  loans  would  have  to  be  made  in  cash  and  credit 
could  enter  into  their  business  only  as  a  means  of  attracting 
depositors. 

§  186.  In  a  previous  chapter  interest  was  described  as  the 
share  of  wealth  assigned  to  capitalists  for  the  use  of  their  cap- 
ital, or  as  the  earnings  of  capital.  Interest  on  bank  loans  does 
not  at  first  thought  appear  to  fall  under  this  definition.  Are 
the  money  and  credit  which  banks  lend  capital?  If  not, 
what  service  do  these  render  to  induce  borrowers  to  pay 
interest  for  their  use?  Satisfactory  answers  must  be  given 
to  these  questions  to  justify  our  definition  of  interest. 

Those  who  borrow  from  banks  wish,  usually,  purchasing 
power  to  enable  them  to  obtain — or,  at  times,  to  retain — con- 
trol over  a  share  of  the  community's  capital.  What  they  really 
borrow  is  not  the  money  or  the  deposit  credit  which  the  bank 
transfers  to  them,  but  the  concrete  forms  of  capital,  economic 
goods  of  various  kinds,  or  stocks  and  bonds  which  represent 
part  ownership  in  aggregates  of  economic  goods,  which  they 
purchase  with  this  money  or  deposit  credit.  The  purchasing 
power  which  the  bank  supplies  is  simply  the  convenient 
medium  by  means  of  which  control  over  capital  is  secured, 
and  interest  is  paid  for  its  use,  ordinarily,  simply  because  the 
capital  which  it  represents  earns  interest.  It  is  a  derived  form 
of  interest  accounted  for  by  the  interchangeability  of  purchas- 
ing power  and  capital  goods. 

For  a  community  which  uses  as  its  medium  of  exchange  only 
self-regulating  standard  money,  for  example,  gold  coin,  the 
answers  to  the  questions  propounded  above  may  be  given 
without  hesitation.     Such  gold  coin  is  itself  capital,  that  is. 


Interest  on  Bank  Loans  333 

the  product  of  past  industry  used  as  an  aifl  ( as  the  "  tool  of 
exchange")  to  further  production.  Only  so  much  wealtli  will 
be  thrown  into  this  form  as  can  earn  the  same  rate  of  return 
that  is  obtained  by  other  kinds  of  capital  goods,  and  this 
return  will  be  secured  because,  as  the  universal  medium  of 
exchange,  money  represents  all  other  goods.  It  is  the  transi- 
tion form  into  which  capital  is  thrown  as  it  passes  from  the 
control  of  those  who  do  not  want  it  as  embodied  in  particular 
capital  goods,  to  those  who  do  w^ant  it  as  so  embodied,  and 
confers  upon  its  possessor  command  over  whatever  combina- 
tion of  capital  goods  he  may  require.  His  willingness  to  pay 
interest  for  its  use  follows  necessarily  from  this  command 
over  interest-earning  capital  goods  which  it  bestows. 

But  no  community  uses  standard  money  only  as  its  medium  Credit  is 
of  exchange.  The  credit  of  the  government  is  called  in  to  give  ^^  bu^Tt" 
currency  to  token  and  credit  money.  Where  banking  is  devel-  Does  the 
oped,  bank  credit  also  serves  on  a  vast  scale  as  a  medium  of  standard 
exchange.  Can  this  credit  which  so  largely  takes  the  place  Money 
of  standard  money  in  modern  business  communities  be  prop- 
erly included  under  the  definition  of  capital?  If  not,  what 
service  does  it  render  which  entitles  those  who  furnish  it  to 
interest  for  its  use?  It  must  be  clearly  asserted  at  the  outset 
that  credit  is  not  capital.  It  may  enable  the  person  w^ho  enjoys 
it  to  secure  capital.  It  may  even,  to  the  extent  that  it  serves 
equally  well  as  the  medium  of  exchange,  take  the  place  of 
capital  in  the  form  of  standard  money.  But  it  is  not  itself 
capital.  Nevertheless,  interest  is  paid  for  its  use  for  exactly 
the  same  reasons  that  it  is  paid  for  the  use  of  standard  money. 
What  the  business  man  wants  when  he  borrows  from  a  bank 
is  purchasing  power.  If  the  bank  can  supply  this  in  the  form 
of  a  deposit  credit,  against  which  he  may  confidently  check 
at  will,  or  in  the  form  of  bank  notes,  he  is  as  well,  if  not 
better,  pleased  than  if  it  supplies  it  in  the  form  of  standard 
money.  What  he  really  wishes  is  the  goods  to  be  bought  for 
the  purchasing  power  loaned  him.  It  is  for  these  that  he  is 
w-illing  to  pay  interest.  It  is  even  these  that  are  really  loaned 
to  him,  since  the  bank  transfers  to  him  a  part  of  its  own 
control  over  the  collective  wealth  of  the  community.  The 
purchasing  power  which  figures  in  the  transaction  soon  passes 


334  Credit  and  Banking 

on  to  someone  else  and  continues  to  circulate  in  the  com- 
munity, changing  hands  perhaps  hundreds  of  times  before 
the  loan  falls  due  and  equivalent  purchasing  power  must 
be  returned  to  the  bank  by  the  borrower.  A  demand  for  bank 
loans  is  thus  at  bottom  not  a  demand  for  money  or  for  credit, 
but  a  demand  for  a  part  of  the  community's  capital.  Money 
or  other  purchasing  power  is  transiently  needed  to  put  the 
borrower  in  control  of  the  capital  he  wishes,  but  its  task  is 
quickly  done,  while  the  capital  remains  in  the  borrower's  pos- 
session. His  demand  for  it  is  due,  not  to  his  position  as  a 
borrower,  but  to  his  position  as  a  prospective  buyer,  and  the 
aggregate  demand  for  money  is  no  greater  in  a  community  in 
which  all  purchases  are  made  with  borrowed  money  than  it  is 
in  a  community  where  the  same  volume  of  purchases  is  made 
with  money  owned  by  the  purchasers  themselves. 
Limitations  §  187.  Conceding  the  accuracy  of  the  above  analysis,  the 
of  Bank  reader  may  be  inclined  to  ask  why  bank  credit,  the  cheaper 
Credit  medium  of  exchange,  does  not,  in  obedience  to  Gresham's  Law, 

entirely  supersede  standard  money.  This  is  because  there  are 
very  definite  limits  to  the  use  that  may  be  made  of  it.  In  the 
first  place,  it  must  never  be  forgotten  that  bank  credit  is  ef^cient 
as  a  medium  of  exchange  only  so  long  as  it  is  convertible  at  will 
into  legal  money.  Bankers  must  be  constantly  on  their  guard 
against  unduly  multiplying  their  deposit  or  note  liabilities,  and 
the  public  must  be  constantly  on  its  guard  against  trusting 
bankers  who  are  not  safe,  conservative  men.  These  two  con- 
siderations confine  the  banking  business  to  those  men  who  may 
be  trusted  not  to  be  carried  away  by  the  possibilities  of  gain 
afforded  by  their  position,  and  cause  such  men  to  regulate  their 
use  of  credit  by  reference  to  the  reserve  of  legal  money  which 
they  are  able  to  maintain  as  a  guarantee  that  all  obligations 
will  be  instantly  discharged.  A  second  point  to  remember  is 
that  the  nature  of  bank  credit  limits  its  use  to  borrowers  whose 
need  of  purchasing  power  is  only  temporary.  A  commercial 
bank  cannot  lend  on  long-time  paper  to  any  considerable 
extent  without  losing  that  quick  control  over  its  assets  that  is 
indispensable  to  its  solvency,  since  nearly  all  of  its  liabilities 
must  be  discharged  on  demand.  Its  loans  must  be  on  call  or 
short-time  paper,  and  this  confines  its  services  to  business  men 


Short-time  Loans  335 

whose  transactions  are  of  such  a  nature  that  they  can  count 
confidently  on  abihty  to  repay  after  a  brief  interval  what  they 
have  borrowed. 

Within  the  limits  determined  by  the  nature  of  their  business,  Interest  on 
commercial  banks  compete  actively  to  lend  their  credit  at  inter-  usually^"^ 
est.  Where  banking  is  well  organised  this  insures  to  those  Low 
business  men  who  can  avail  themselves  of  call  and  short-time 
loans,  accommodation  at  rates  of  interest  as  low,  and  at  times 
even  lower  than  that  paid  by  the  safest  long-time  investments. 
The  lowest  rate  normally  is  that  paid  for  call  loans.  Only 
men  who  are  engaged  in  operations  on  the  stock  exchange, 
which  they  believe  they  can  conclude  without  loss  on  short 
notice,  venture,  usually,  to  make  themselves  liable  for  loans  of 
this  character.  In  contrast  with  the  limited  demand  for  such 
accommodation  on  the  side  of  borrowers,  there  is  an  almost 
indefinitely  large  supply  of  funds  to  be  loaned  at  call  on  the 
side  of  lenders.  Other  things  being  equal,  call  loans  are  those 
dearest  to  the  banker's  heart.  They  enable  him  virtually  to 
"  have  his  cake  and  eat  it  too,"  to  retain  control  over  his  assets 
at  the  same  time  that  these  are  earning  interest.  These  two 
circumstances  explain  why  the  call  rate  is  sometimes  as  low 
as  one-half  of  i  per  cent,  and  usually  lower  than  the  rate  on  the 
safest  bond  investments.  The  call  rate  is  also  the  one  subject  to 
the  most  violent  fluctuations.  Those  who  borrow  on  call  do  so 
nearly  always  to  buy  stocks  or  bonds.  If  their  calculations  mis- 
carry, they  may  be  asked  to  repay  at  the  very  time  when  it  is 
most  awkward  to  do  so.  Rather  than  sell,  on  a  depressed 
market,  the  securities  they  have  purchased,  borrowers  are 
often  willing  to  pay  extravagant  rates  of  interest  for  a  few 
days  in  the  hope  that  the  prices  of  these  securities  will  rally. 
It  is  thus  not  uncommon  for  the  call  rate  to  rise  to  50,  75,  or 
even  100  per  cent,  for  a  few  hours  or  days  when  a  panic  in 
stocks  is  in  progress  and  banks  are  calling  in  their  loans  in 
anticipation  of  stormy  weather. 

Loans  on  short  time,  which  are  less  attractive  to  lenders,  are,  Short-tima 
on  the  whole,  more  attractive  to  borrowers,  but,  as  before, 
those  who  wish  the  use  of  purchasing  power  for  thirty,  sixty, 
or  ninety  days  only,  are  a  limited  class.    The  normal  relation 
between  supply  and  demand  fixes  the  rate  of  interest  on  short 


33^ 


Credit  and  Banking 


Competi- 
tion Ad- 
justs Bank 
Rate  of 
Interest  to 
General 
Rate 


Ought 
Bankicg 
to  be 
Regulated? 


time  loans  comfortably  above  the  call  rate  and  even  somewhat 
above  the  rate  on  such  permanent  investments  as  safe  railroad 
bonds  or  real  estate  mortgages.  The  rate  on  long-time  loans  is 
little  affected  by  the  use  of  bank  credit  as  a  medium  of  ex- 
change in  place  of  standard  money,  for  the  reason  already 
explained  that  commercial  banks  cannot  afford  to  tie  up  their 
loanable  funds  under  long-time  contracts. 

Speaking  generally,  it  is  the  tendency  in  countries  in  which 
the  banking  business  is  open  to  all  who  can  command  the  requi- 
site capital,  as  it  is  in  the  United  States,  for  the  supply  of  funds 
loanable  at  call  or  on  short  time  to  be  multiplied  until  the  rate 
of  interest  on  such  loans  bears  a  certain  normal  relation  to  the 
rates  of  interest  in  other  fields  of  investment.  Ability  to  loan 
their  credit  as  well  as  standard  money  enables  commercial 
banks  to  satisfy  the  requirements  of  business  men  at  lower  rates 
of  interest  than  could  possibly  be  oft'ered  if  every  loan  nego- 
tiated meant  so  much  cash  withdrawn  from  the  control  of  the 
bank.  Competition  prevents  the  banks  from  retaining  for  them- 
selves the  profit  which  results  from  the  use  cf  their  credit. 
They  share  it  with  their  customers,  and  through  these  custom- 
ers the  wdiole  business  community  is  benefited.  At  last  analy- 
sis, rates  of  interest  on  bank  loans  are  determhied,  like  other 
rates  of  interest,  by  the  earning  power  of  capital.  Credit  serves 
merely  to  supplement  standard  money  as  a  medium  of  exchange 
and  introduces  no  new  principle  to  necessitate  a  qualification  of 
the  explanation  of  interest  already  given. 

§  i88.  There  is  still  great  difference  of  opinion  among  econ- 
omists as  to  whether  banking  ought  to  be  entirely  free  or  regu- 
lated by  law.  The  reasons  in  favour  of  unregulated  banking 
are  similar  to  those  in  favour  of  freedom  in  other  fi.elds  of  busi- 
ness enterprise.  It  is  pointed  out  that  the  credit  relations  into 
which  banks  enter  with  their  depositors  and  borrowers  are 
purely  voluntary,  and  that  ordinary  economic  motives  tend  to 
concentrate  the  business  into  the  hands  of  upright  and  conserv- 
ative men.  ]\Ioreover.  it  is  maintained  that  the  normal  expan- 
sion and  contraction  of  bank  credit  are  of  such  vital  importance 
to  the  whole  business  community  that  their  regulation  ought  to 
be  entrusted  to  those  who  have  been  chosen  by  a  process  of 
natural  selection  to  manage  the  banking  business,  and  not  sub- 


Reasons  for  Favouring  Regulation      337 

jected  to  administrative  rules  of  thumb.  Bank  credit,  in  the 
form  of  deposit  accounts  and  bank  notes,  is  a  highly  flexible 
element  in  the  medium  of  exchange.  By  means  of  a  check  a 
million  dollars  may  be  paid  out  as  readily  as  one  dollar.  Where 
all  business  men  have  bank  accounts  the  medium  is  made  abso- 
lutely elastic  by  means  of  this  convenient  credit  device.  Bank 
notes  are  not  quite  as  elastic  as  checks,  and  yet  when  additional 
currency  is  required  to  pay  wages  and  interest  at  the  end  of 
the  month,  the  half-year,  or  the  year,  to  move  the  crops  at  har- 
vest time,  or  to  provide  for  some  other  passing  need,  the  nature 
and  extent  of  which  are  perfectly  well  understood,  banks,  which 
are  not  restricted,  may  meet  the  emergency  by  adding  to  their 
note  liabilities. 

Tlie  importance  of  an  elastic  element  in  the  medium  of 
exchange  can  hardly  be  exaggerated.  In  every  community 
the  need  for  the  medium  of  exchange  is  variable.  At  cer- 
tain times  few  exchanges  take  place,  and  a  small  amount  of 
money  and  its  substitutes  will  maintain  prices  at  their  nor- 
mal level.  At  other  seasons  buying  and  selling  are  active,  the 
medium  of  exchange  is  in  great  demand  and  unless,  as  a  whole, 
it  expands  readily  to  meet  the  situation,  the  disease  known  as  a 
"  money  stringency  "  will  attack  the  community  with  its  accom- 
panying symptoms,  a  rising  rate  of  interest  and  falling  prices. 
A  varying  demand  for  the  medium  of  exchange  is  especially 
characteristic  of  agricultural  communities.  During  the  greater 
part  of  the  year  the  buying  and  selling  which  take  place  among 
farmers  are  of  very  small  proportions.  At  har%'est  time,  how- 
ever, the  entire  product  of  the  year's  industry  changes  hands, 
often  within  a  period  of  two  or  three  weeks.  Unless  the  me- 
dium of  exchange  expands  readily  at  such  seasons,  a  money 
stringency  is  sure  to  occur  and  prices  will  fall  at  the  very  time 
when  it  is  most  important  to  the  whole  community  that  they 
should  be  sustained.  Advocates  of  unregulated  banking  maiti- 
tain  that  elasticity  in  the  check  and  note  currency  can  best  be 
secured  by  permitting  bankers  to  exercise  perfect  freedom  in 
the  conduct  of  their  business. 

Notwithstanding  the  force  of  the  argimients  in  favour  of  un-  Reasons-for 
regulated  banking,  nearly  all  countries  subject  their  banking  Regulaticm 
institutions  to  some  degree  of  control,  and  for  reasons  which 


338 


Credit  and  Banking 


History 
of  the 
National 
Banking 
System 


The 

Present 

Law 


seem  to  the  writer  conclusive  in  favour  of  the  policy.  The  ex- 
tension of  banking  depends  primarily  upon  the  presence  in  the 
community  of  mutual  confidence.  Depositors  and  note-holders 
must  have  confidence  in  the  bank  officials.  Banks, in  turn,  must 
have  confidence  in  those  to  whom  they  lend.  This  mutual  con- 
fidence is  of  slow  growth,  and  since  its  fruits  are  so  important 
everything  should  be  done  to  preserve  it  after  it  has  developed 
to  a  point  which  makes  banking  practicable.  If  each  bank  were 
judged  by  itself  in  the  popular  mind  the  arguments  in  favour 
of  free  banking  would  be  convincing;  but  the  popular  mind 
does  not  judge  each  bank  by  itself.  It  judges  of  the  institution 
of  banking  as  a  whole.  One  bank  failure  in  a  community  in 
which  banks  are  just  developing  will  serve  to  bring  the  whole 
business  into  disrepute.  For  this  reason  it  is  to  the  interest  of 
bankers  themselves  to  have  their  business  subjected  to  regula- 
tions which  will  hold  them  all  up  to  a  certain  standard  of  hon- 
esty and  conservatism.  Admitting  the  need  of  government 
regulation  as  a  condition  to  the  highest  development  of  the 
banking  business,  it  remains  a  difficult  question  to  decide  in  any 
given  case  how  far  regulation  should  go.  This  concrete  aspect 
of  the  problem  can  best  be  considered  in  connection  with  a 
description  of  the  national  banking  system  of  the  United 
States. 

§  189.  The  national  banking  system  of  the  United  States 
was  an  outgrowth  of  the  Civil  War.  To  meet  the  expenses  of 
that  struggle  the  Federal  Government  was  forced  to  issue 
bonds  on  an  unprecedented  scale.  The  national  banks  were 
created  to  furnish  a  market  for  these  bonds  and  at  the  same  time 
to  take  the  place  of  the  State  banks,  which  were  not  in  a  sound 
condition  in  all  sections  of  the  country.  The  original  act, 
passed  in  1863,  was  revised  in  important  respects  by  the 
National  Bank  Act  of  June,  1864,  which,  as  amended  by  sub- 
sequent statutes,  is  still  the  basis  of  the  system. 

General  supervision  over  the  national  banks  is  vested  in  the 
Comptroller  of  the  Currency,  who  represents  the  Secretary  of 
the  Treasury  in  all  his  relations  with  these  institutions.  The 
law  permits  the  former  officer  to  issue  certificates  of  incorpo- 
ration, valid  for  twenty  years,  to  any  five  reputable  citizens  who 
wish  to  establish  a  national  bank  and  can  command  the  requi- 


Protection  for  Depositors  339 

site  capital.*  Banks  organised  with  a  capital  of  $150,000  or 
less  must  invest  one-fourth  of  their  capital  in  United  States 
bonds  and  deposit  them  with  the  Comptroller  of  the  Currency. 
Originally,  larger  banks  had  to  so  invest  one-third  of  their  capi- 
tal, but  at  present  the  requirement  for  such  banks  is  the  de- 
posit of  $50,000  only  in  bonds.  Any  national  bank  may  so 
invest  its  entire  capital.  In  exchange  for  the  bonds  deposited, 
the  Comptroller  is  required  to  issue  national  bank  notes  up  to 
their  par  value  (or  their  market  value  if  they  are  quoted  below 
par).  Banks  which  receive  such  notes  must  deposit,  in  addition 
to  the  bonds,  a  redemption  fund  in  lawful  money  equal  to  5  per 
cent,  of  the  face  value  of  their  notes  in  circulation.  On  the 
strength  of  this  double  security  the  United  States  Government 
assumes  responsibility  for  the  redemption  of  such  notes,  with 
the  consequence,  as  already  pointed  out,  that  they  are  con- 
sidered as  safe  throughout  the  United  States  as  any  kind  of 
money  in  circulation.  Besides  issuing  notes — a  function 
practically  confined  to  the  national  banks,  since  the  demand 
notes  of  State  institutions  are  subject  to  a  tax  of  10  per  cent, 
under  an  act  passed  in  1865 — the  national  banks  may  engage 
in  a  general  banking  business,  except  that  they  may  not  lend  on 
the  security  of  real  estate. 

Depositors  in  the  national  banks  are  protected  in  various  Protection 
ways.  When  such  banks  fail,  their  stockholders  are  liable  to  Denositors 
assessment,  to  make  up  any  deficit,  up  to  the  full  par  value  of 
their  stock.  The  banks  are  required  to  make  at  least  five  re- 
ports of  their  condition  in  the  course  of  each  year  on  such  dates 
as  may  be  designated  without  previous  notice  by  the  Comptrol- 
ler. They  must  also  submit  to  periodic  examinations — also 
unannounced — by  bank  examiners  acting  under  the  orders  of 
the  Comptroller  and  empowered  to  inquire  into  every  detail  cal- 
culated to  throw  light  on  the  true  condition  of  the  bank  exam- 
ined. Finally,  the  banks  are  divided  into  three  classes — central 
reserve  city  banks  (those  of  New  York,  Chicago,  and  St.  Louis, 
on  July  I,  1903),  reserve  city  banks,  and  others.  The  first 
class  are  required  to  keep  continuously  a  reserve  in  lawful 

*The  minimum  capital  in  places  of  50,000  or  more  inhabitants  is 
$200,000.  An  amendment  added  in  1900  makes  the  minimum  for 
places  of  3000  inhabitants  or  less  $25,000. 


340  Credit  and  Banking 

money  equal  to  25  per  cent,  of  their  deposit  liabilities.*  The 
second  class  must  also  have  a  reserve  of  25  per  cent.,  but  one- 
half  of  this  may  be  kept  on  deposit  with  national  banks  in  the 
central  reserve  cities.  The  reserve  required  of  banks  in  the 
third  class  is  only  15  per  cent.,  and  of  this  three-fifths  may  be 
kept  on  deposit  with  national  banks  in  reserve  cities.  When- 
ever a  bank's  reserve  falls  below  the  legal  minimum  it  is 
required  to  discontinue  its  discount  business  until  the  reserve 
is  restored,  and  if  this  is  not  accomplished  within  thirty  days 
it  may  be  placed  in  the  hands  of  a  receiver. 

Faults  in  S  igo.  Qn  the  whole,  the  banking-  system  which  has  grown 

System  ,        ,  1     •         •  1         -t    /1  ,         ••,-•, 

up  under  the  regulations  just  described  has  more  than  justified 

the  anticipations  of  its  authors.  National  bank  notes  have 
proved  a  perfectly  safe  medium  of  exchange,  and  depositors  in 
national  banks  have  lost  surprisingly  little  as  the  result  of  bank 
failures  since  the  system  came  into  operation.  There  are,  how- 
ever, two  respects  in  which,  in  the  opinion  of  most  authorities, 
the  system  admits  of  improvement.  These  are  in  connection 
with  the  note-security  and  reserve  requirements  of  the  present 
law. 
United  The  primary  reason  for  permitting  banks  to  issue  notes  is  to 

Bank  Notes   enable  them  to  supply  the  business  community  with  a  cheap  and 

are  Per-        elastic  medium  of  exchange  in  sections  and  for  transactions  for 

versely  .  . 

Elastic  which  checks  are  unavailable.     The  bank-note  system  of  the 

United  States  is  perversely  elastic.  Helpful  elasticity  results 
when  banks  are  put  in  a  position  which  makes  it  profitable  for 
them  to  issue  additional  notes  when  more  currency  is  needed, 
and  to  withdraw  notes  from  circulation  when  the  currency  is 
redundant.  One  symptom  of  a  need  for  currency,  in  districts 
which  cannot  make  large  use  of  checks  against  deposits  as  a 
medium  of  exchange,  is  the  withdrawal  of  deposits,  and  this 
must  force  banks  to  raise  their  rate  of  interest  unless  they  can 
meet  the  emergency  by  an  issue  of  notes.  A  redundant  cur- 
rency, on  the  other  hand,  is  indicated  by  an  increase  in  deposits. 
If  the  bank  note  currency  is  elastic  it  will  expand  to  satisfy  the 
increased  demand  for  currency  in  the  former  case,  and  contract 

*This  requirement  does  not  apply  to  deposits  of  the  United  States 
Government  in  national  banks,  but  the  latter  must  be  secured  by 
bonds  deposited  with  the  Secretary  of  the  Treasury. 


Freer  Note  Issue  Necessary  341 

in  the  latter.  This  takes  place  under  an  unregulated  banking 
system,  but  under  the  system  of  the  United  States,  which 
requires,  in  addition  to  the  5  per  cent,  redemption  fund 
deposit,  a  dollar-for-dollar  bond  deposit,  a  contraction  in 
bank  deposits  makes  profitable  not  the  issue,  but  the  with- 
drawal of  notes.  When  deposits  are  being  withdrawn  a  bank 
wishes  to  increase  its  available  funds.  It  cannot  do  this  in  the 
United  States  by  issuing  bank  notes,  because  for  every  one 
hundred  dollars  so  issued  more  than  one  hundred  dollars  must 
be  tied  up  in  the  premium  bonds  and  redemption  deposit  re- 
quired as  security.  On  the  contrary,  it  can  do  it  by  withdraw- 
ing bank  notes  from  circulation,  because  for  ninety-five  dollars 
in  legal  money  sent  to  Washington  for  this  purpose  a  bond  that 
may  be  sold  at  once  for  more  than  one  hundred  dollars  will  be 
returned.  It  is  only  when  the  currency  is  already  redundant 
that  national  banks  are  likely  to  find  it  profitable  to  increase 
their  note  issues.  At  such  times  they  have  unloaned  money  in 
tlieir  vaults.  Investing  this  money  in  Government  bonds  which 
afiford  an  interest  and  receiving  back  a  nearly  equal  sum  in 
bank  notes  may,  under  these  circumstances,  prove  profitable. 
The  tendency  of  bank  notes  under  our  national  banking  system 
is  thus  to  contract  when  expansion  is  desirable,  and  to  expand 
when  the  currency  is  already  redundant.  The  system  thus 
serves  to  intensify  evils  which  a  better  system  would  help  to 
cure. 

Space  will  not  permit  a  detailed  discussion  of  the  remedies  Freer 
that  have  been  proposed  for  the  defect  just  described,  but  it  x°^ess^arv 
is  obvious  that  they  must  include  modifications  in  the  law  cal- 
culated to  give  the  country  a  less  perfectly  secured  bank  note. 
Only  when  the  national  banks  are  permitted  to  issue  notes  on 
something  less  than  dollar-for-dollar  security  will  they  find  it 
profitable  to  add  to  their  circulation  when  more  currency  is 
needed,  and  to  contract  it  when  the  medium  of  exchange  is 
redundant.  The  protection  of  note-holders  must  be  sought 
along  the  line  of  only  slightly  more  stringent  regulations  than 
those  which  now  protect  depositors,  if  bank  credit  in  the  form 
of  bank  notes  is  to  become  as  elastic  an  element  in  the 
medium  of  exchange  as  is  already  bank  credit  in  the  form  of 
deposit  accounts,  against  which  checks  may  be  drawn  at  will. 


Defect 
in  Reserve 
Require- 
ments 


State 
Banks 


342  Credit  and  Banking 

Canadian  law  permits  Dominion  banks  to  issue  bank  notes  up 
to  the  full  amount  of  their  paid-in  capital  with  the  sole  limita- 
tion that  they  must  deposit  5  per  cent,  of  the  value  of  such 
notes  in  a  redemption  fund,  for  the  maintenance  of  which  they 
are  jointly  responsible.  By  adding  to  this  collective  responsi- 
bility the  provision  that  bank  notes  shall  constitute  a  first  lien 
on  the  assets  of  failed  banks,  the  law  has  given  Canada  an 
■  elastic  bank-note  currency  under  which  not  a  single  dollar  has 
yet  been  lost  by  holders  of  the  country's  bank  notes.  There 
seems  good  reason  to  believe  that  a  modification  of  this  system 
of  "  asset  currency  "  might  be  adopted  in  the  United  States 
with  advantage  both  to  the  banks  and  to  the  public. 

The   second  defect  referred  to  consists  in   permitting  the 
reserves  required  by  law  of  national  banks  in  classes  two  and 
three  to  be  deposited  in  part  with  other  banks.    To  the  extent 
that  legal  reserves  are  necessary,  they  should  be  required  with- 
out qualification  of  the  banks  for  which  the  reserve  is  intended. 
The  present  system  of  the  United  States  tends  to  concentrate  a 
large  part  of  the  reserves  of  national  banks  in  the  national 
banks  in  central  reserve  cities,  and  especially  in  New  York. 
Since  the  latter  treat  the  deposits  of  other  banks  in  much  the 
same  way  that  they  do  the  deposits  of  individuals  and  maintain 
ordinarily  only  the  25  per  cent,  reserve  against  them  required 
by  law,  the  banking  system  of  the  whole  country  is  exposed  to 
serious  danger  whenever  any  unusual  demand  is  brought  to 
bear  on  the  banks  of  New  York.    This  concentration  of  respon- 
sibility for  the  whole  credit  system  in  the  financial  centre  of 
the  country  is  to  some  extent  natural  and  inevitable,  but  it 
seems  in  the  highest  degree  imprudent  to  deliberately  encourage 
and  extend  it,  as  does  the  present  law.     Requiring  each  bank 
to  keep  in  its  own  vaults  its  legal  reserve  would  serve  to  foster 
conservative  banking,  whereas  the  present  system  conduces  to 
recklessness  and  disregard  on  the  part  of  the  banks  of  their 
individual  responsibility  to  their  own  depositors. 

§  191.  In  addition  to  the  national  banks,  of  which  there  were 
on  June  9,  1903,  4939  with  an  aggregate  capital  of  $743<500r 
000  and  aggregate  loans  and  discounts  equal  to  $3,415,000,000, 
there  are  in  the  United  States  an  almost  equal  number  of  State 
banks  and  a  large  number  of  savings  banks  and  trust  com- 


Conclusion  343 

panics.    The  regulations  in  regard  to  State  banks  vary  greatly. 

In  several  of  the  Eastern  States  {e.  g.,  Massachusetts  and  New 

York)  they  are  as  rigid  as  those  applying  to  national  banks. 

Such  States  have  staffs  of  officials  charged  with  the  supervision 

of  their  banks,  and  the  latter  arc  in  many  instances  as  highly 

regarded  as  the  national  institutions  with  which  they  compete. 

Saving  banks  are  institutions  organised,  as  the  term  implies.  Savings 

,  .      r  ,...,.  Banks 

to  encourage  savmg  on  the  part  of  persons  of  hmited  mcomes. 

They  are  often  purely  mutual  institutions,  the  entire 
profits  being  distributed  as  interest  to  the  depositors  or  accu- 
mulated as  a  surplus  for  the  latter's  protection.  As  a  general 
rule,  they  receive  only  time  deposits,  on  which  they  pay  interest 
ranging  in  different  sections  of  the  country  from  2Y2  to  4 
per  cent.  The  law  usually  defines  very  narrowly  the  secur- 
ity on  which  they  may  make  loans  and  the  kinds  of  investments 
open  to  them.  The  aggregate  deposits  credited  to  the  1036 
savings  banks  in  the  United  States  on  June  30,  1902,  were 
$2,650,000,000. 

Trust  companies,  although  organised  primarily  for  the  ad-  Trust 
ministration  of  estates  and  other  trust  funds,  have  come  to 
take  a  prominent  part  in  the  banking  business  of  the  country. 
Owing  to  their  comparatively  recent  origin,  they  have  not  yet 
been  subjected  to  as  strict  regulations  as  apply  to  State  and 
national  banks,  and  in  consequence  they  are  able  to  carry  on 
their  banking  operations  with  greater  freedom.  In  the  financial 
centres  of  the  country  their  growth  in  recent  years  has  been 
phenomenal.  On  January  i,  1903,  in  Xew  York  State  alone 
they  commanded  a  capital  of  $190,671,155  and  deposits  of 
$823,797,853. 

§  192.  It  would  be  difficult  to  exaggerate  the  importance  of  Conclusion 
the  services  which  credit,  and  especially  bank  credit  in  its 
various  forms,  renders  the  business  community.  Through  the 
agency  of  banks  a  cheap  and  elastic  medium  of  exchange  is 
substituted  for  money,  which  is  both  costly  and  for  many  pur- 
poses inconvenient.  They  serve  to  gather  together  the  small 
savings  of  thousands  of  persons,  to  whom  they  are  of  no  imme- 
diate use,  and  to  put  them  at  the  disposal  of  active  entre- 
preneurs on  terms  which  enable  the  latter  to  produce  at  a 
minimum  of  cost.     Finally,  they  are  tJie  ready  agents  of  the 


344  Credit  and  Banking 

Government  and  of  great  corporations  when  large  sums  of 
purchasing  power  are  required,  and  carry  through  easily  finan- 
cial operations  which  without  their  aid  would  be  fraught  with 
most  serious  consequences  to  the  whole  business  world.  Not- 
withstanding these  services,  there  is  in  the  United  States  a 
widespread  distrust  of  banks  and  bankers,  which  has  been  re- 
flected more  than  once  in  Federal  and  State  legislation.  The 
impression  is  widely  prevalent  that  while  banks  themselves  reap 
large  gains  by  lending  their  credit  at  interest,  no  corresponding 
benefits  extend  to  those  who  borrow  from  banks.  That  this 
belief  is  without  foundation  has  been  suggested  in  the  preced- 
ing sections.  In  banking  as  in  other  branches  of  business 
competition  is  a  force  which  compels  a  sharing  of  profits  with 
the  whole  community.  The  more  fully  the  banker  is  permitted 
to  utilise  his  credit  either  in  the  form  of  deposit  accounts  or 
bank  notes,  the  lower  will  be  the  rate  of  interest  which  he  can 
afford  to  take  for  his  services,  and  competition  may  be  relied 
upon  to  force  him  to  accept  this  lower  rate.  The  guiding 
principle  in  connection  with  bank  regulations  should  be  to 
grant  the  fullest  liberty  that  is  compatible  with  a  reasonable 
degree  of  security.  Little  fear  need  be  entertained  lest  in  the 
long  run  this  liberty  will  not  be  used  to  advance  the  general 
good. 

REFERENCES  FOR  COLLATERAL   READING 

In  addition  to  the  references  given  in  the  preceding  chapter  the  follow- 
ing are  suggested  :  *  Dunbar,  The  Theory  and  History  of  Banking  ; 
Macleod,  Theory  and  Practice  of  Banking  ;  Bolles,  Practical  Bank- 
ing ;  *Cona?if,  History  of  Modern  Banks  of  Issue;  Knox,  History  of 
Banking  ;  Hadley,  Economics,  Chap.  VHI. 


CHAPTER  XIX 
SOME    UNSETTLED   MONETARY    PROBLEMS 

§  193.  Although  the  subject  of  money  was  one  of  the  first  to  L^'nsettled 
engage  the  attention  of  economists  and  thousands  of  volumes  ^oDlems 
and  pamphlets  have  been  written  concerning  it,  there  is  still 
great  difference  of  opinion  in  regard  to  some  of  the  problems 
which  it  presents.  These  have  been  styled  "  unsettled,"  to  warn 
the  reader  that  in  this  chapter  controverted  points  are  con- 
sidered and  that  he  must  be  on  his  guard  against  accepting  too 
readily  the  opinions  of  the  author.  The  first  problem  relates 
to  the  factors  which  determine  the  value  of  money  or — what  is 
the  same  thing — the  level  of  prices. 

The  influences  which  connect  the  value  of  the  dollar  of  the  The  Value 
United  States  with  the  value  of  23.22  grains  of  gold  have  al-  andPrices 
ready  been  explained.*  So  long  as  these  continue  active  the 
gold  standard  must  be  maintained  and  "  the  value  of  money  " 
\Yill  be  merely  another  expression  for  the  value  of  gold.  Our 
problem  reduces  therefore  to  an  explanation  of  the  circum- 
stances which  determine  the  value  of  gold.  In  previous  chap- 
ters it  has  been  shown  that  the  value  of  any  commodity  depends 
transiently  upon  the  temporary  relation  between  the  demand 
for  it  and  its  supply  and  in  the  long  run  on  the  more  permanent 
influences  which  adjust  the  normal  supply  to  the  normal  de- 
mand. The  demand  for  a  commodity  springs  from  the  various 
uses  to  which  it  is  put.  In  the  case  of  gold  we  may  distinguish 
these  as  the  industrial  and  arts  uses  which  give  rise  to  what  we 
will  call  the  "  arts  demand,"  the  use  as  a  medium  of  exchange 
which  gives  rise  to  the  "  monetary  demand  "  proper,  and  the 
use  as  a  reserve  of  value  for  the  redemption  of  credit  money 
and  credit  instruments  generally,  which  gives  rise  to  a  second- 
ary monetary  demand,  which  we  will  call  the  "  reserve  de- 
mand." An  increase  in  either  of  these  three  forms  of  demand 
♦Chapter  XVII,,  Sections  175  and  176. 
345 


Demand 
for  Gold 
in  Arts 


Monetary- 
Demand 


346     Some  Unsettled  Monetary  Problems 

tends  to  increase  the  value  of  gold  and  incidentally  to  with- 
draw it  from  other  uses  to  the  use  in  connection  with  which 
the  increase  in  demand  has  arisen.  On  the  other  hand,  a  de- 
crease in  the  supply  of  gold  will  tend  to  increase  its  value.  Un- 
less the  increased  demand  is  balanced  by  an  increased  supply  or 
the  decreased  supply  by  a  decreased  demand,  the  increase  in 
value  will  actually  occur  and  the  level  of  prices  will  fall. 
Exactly  opposite  results,  of  course,  follow  a  decrease  in  either 
form  of  demand  or  an  increase  in  supply. 

§  194.  Although  the  demand  for  gold  for  different  uses  does 
not  admit  of  exact  measurement,  something  may  be  said  in  re- 
gard to  the  circumstances  which  cause  it  to  vary.  The  prin- 
cipal source  of  the  arts  demand  is  the  use  of  gold  for  ornament 
and  display.  With  the  progress  of  civilisation  this  demand  is 
lessened  as  regards  one  section  of  the  community,  and  in- 
creased as  regards  another.  Highly  developed  men  and  women 
care  little  for  gold  jewelry,  gold  plate,  etc.,  but  on  the  other 
hand  with  the  increase  of  general  wealth  these  things  are 
brought  each  year  within  the  reach  of  less  highly  developed 
people  who  do  care  for  them  greatly.  On  the  whole,  the  arts 
demand  for  gold  is  extremely  elastic  and  gives  no  promise  of 
decreasing  relatively  within  the  immediate  future. 

The  monetary  demand  for  gold  depends  upon  the  number  of 
exchange  transactions  to  be  eft'ected  with  gold  coin  as  the 
medium  of  exchange.  If  this  is  thought  of  with  reference  to  a 
particular  period  of  time,  as  for  example  a  week  or  a  month, 
allowance  must  be  made  for  the  "  rapidity  of  circulation,"  that 
is,  the  number  of  exchanges  in  which,  on  the  average,  each  gold 
coin  will  figure  within  the  period.  Some  writers  speak  of  the 
rapidity  of  circulation  as  though  it  added  to  the  supply  of 
money,  but  it  seems  more  logical  to  describe  it  as  a  cause 
lessening  the  demand.  No  one  would  think  of  an  improve- 
Tient  which  doubled  the  speed  at  which  trolley  cars  move 
through  city  streets  as  increasing  the  supply  of  such  cars,  and 
there  seems  as  little  reason  to  credit  such  influence  to  changes 
which  increase  the  rapidity  at  which  pieces  of  money  circulate. 
Both  serve  to  lessen  the  community's  need  for  such  conveni- 
ences for  the  accomplishment  of  given  amounts  of  work. 

Much  confusion  in  regard  to  the  demand  for  money  has  re- 


Money  and  Credit  347 

suited  from  failure  to  discriminate  between  it  and  the  demand  Not 
for  wealth  in  g-eneral.  Command  over  money  carries  with  it  Unlimited 
command  over  wealth  and  this  has  led  to  the  identification  of 
the  two.  But  it  is  equally  true  that  command  over  any  valu- 
able commodity,  such  as  wheat  or  iron,  carries  with  it  com- 
mand over  other  valuable  things,  and  yet  no  one  would  say,  as 
economists  of  standing  have  said  of  money,  that  either  of  these 
is  the  one  thing  "  of  which  no  one  ever  has  enough."  *     As  a  ' 

matter  of  fact  the  demand  for  money  is  as  strictly  limited  as  the 
demand  for  any  other  useful  thing.  Far  from  being  the  one 
thing  "  of  which  no  one  ever  has  enough,"  it  is  the  one  thing 
which  people  are  most  prompt  to  get  rid  of  when  they  receive 
it  in  any  considerable  quantity.  No  one  wants  to  be  cumbered 
with  more  money  than  he  expects  to  need  as  a  medium  of 
exchange,  and  anything  in  excess  of  this  is  normally  turned 
over  to  banks  and  other  financial  institutions  and  by  them 
passed  on  to  borrowers  whose  need  for  money  is  not  entirely 
satisfied.  Of  course  there  are  instances  in  which  persons  of 
disordered  imagination  have  coveted  gold  for  its  own  sake,  but 
even  misers  of  this  type  demand,  in  the  economic  sense,  only 
so  much  gold  as  they  can  afford  to  own,  no  matter  how  un- 
limited their  desire  for  gold  may  be. 

§  195.  The  number  of  exchange  transactions  to  be  eflfected  Money 
in  a  community  depends,  of  course,  upon  the  amount  of  wealth 
produced  and  the  organisation  of  production,  that  is,  the  extent 
to  which  a  division  of  labour  is  carried  out,  the  number  of 
middle-men  and  speculators  who  intervene  between  producers 
and  consumers,  and  the  frequency  w4th  which  ownership  over 
the  instruments  of  production  and  the  stocks  and  bonds,  which 
represent  them,  change  hands.  No  one  of  these  admits  of 
statistical  measurement,  but  this  is  because  of  the  incomplete- 
ness of  the  available  statistical  data  and  not  at  all  because  they 
are  not  perfectly  definite  and  measurable.  Given  the  number 
of  exchanges  to  be  efifected,  the  demand  for  gold  to  which  they 
give  rise  depends  upon  the  proportion  of  them  that  are  accom- 
plished by  means  of  barter  and  by  means  of  credit.  In  com- 
parison with  credit,  barter  now  plays  such  an  insignificant  role 
that  its  influence  may  be  almost  ignored.  Some  intimation 
*  Professor  William  Smart  in  Studifs  ni  Economics,  p.  145. 


348     Some  Unsettled  Monetary  Problems 

was  given  in  the  preceding  chapter  of  the  extent  to  which  credit 
now  serves  as  a  medium  of  exchange.  It  was  there  stated  that 
probably  one-half  of  the  ordinary  mercantile  transactions  that 
take  place  in  the  United  States  are  effected  by  means  of  book 
credit.  This  is  a  mere  guess,  but  somewhat  more  accurate 
data  may  be  given  in  reference  to  the  part  played  by  forms  of 
credit  money  and  bank  credit  as  media  of  exchange.  The 
statistics  given  in  Chapter  XVII.,  Section  175,  indicate  that 
more  than  one-half  of  the  monetary  stock  of  the  United  States 
is  token  and  credit  money,  and  experience  and  observation 
prove  that  it  is  this  rather  than  gold  coin  that  serves  as  the 
actual  medium  of  exchange  in  nearly  all  transactions  in  which 
money  is  used.  In  other  countries  gold  coin  is  more  largely 
used,  but  in  all,  token  and  credit  money  are  supplementary 
media  of  exchange.  The  importance  of  bank  credit  in  the 
United  States  is  indicated  by  the  following  facts  :  According  to 
the  report  of  the  Comptroller  of  the  Currency  the  deposits  in 
national  banks  on  June  9,  1903,  aggregated  $4,628,000,000,  of 
which  $3,231,000,000  were  the  deposits  of  individuals.  The 
volume  of  business  which  this  and  the  deposit  currency  of  State 
banks  and  trust  companies  is  capable  of  accomplishing  is  in- 
dicated by  the  fact  that  in  1902  the  total  value  of  the  checks 
which  passed  through  the  clearing  houses  of  the  country  w^as 
$118,118,000,000.  When  it  is  remembered  that  in  addition  to 
this  enormous  total  there  was  a  considerable  value  of  checks 
which  failed  to  pass  through  the  clearing  houses,  some  notion 
is  obtained  of  the  extent  to  which  the  exchange  business  of  the 
country  is  affected  by  means  of  bank  credit.  These  statistics 
for  the  United  States  are  paralleled  in  other  English-speaking 
countries,  and  although  the  use  of  bank  credit  has  been  less 
highly  developed  by  other  peoples,  there  is  no  civilised  nation 
in  which  it  is  not  by  far  the  most  important  single  medium  of 
exchange.  From  this  fact  it  results  that  the  demand  for  gold 
as  a  medium  of  exchange  even  in  gold-standard  countries  is  in 
ordinary  times  insignificant  in  comparison  with  the  volume  of 
exchange  transactions  effected.  It  follows  also  that  this  in- 
significant demand  is  capable  in  times  of  emergency,  when  the 
use  of  credit  is  contracted,  of  expanding  to  alarming  pro- 
portions. 


'I'hc  Reserve  Demand  349 

§  196.  In  consequence  of  the  changing  monetary  poHcies  of  Recent 
leading  commercial  nations  the  monetary  demand  for  gold  has  tions  Tn" 
been  subject  to  remarkable  variations  during  the  last  thirty  Monetary 
years.  Each  new  country  that  has  adopted  the  gold  standard 
has  been  forced  to  secure,  at  whatever  cost  to  itself,  some  share 
of  the  world's  gold  supply.  This  has  given  rise  to  a  veritable 
"  scramble  for  gold,"  which  threatened  for  a  time  to  have  dis- 
astrous consequences.  There  seems  to  be  every  reason  to  think 
that  this  extreme  competition  for  gold  is  now  over,  and  that  the 
adoption  of  the  gold  standard  by  the  few  countries  which  have 
lagged  behind  in  this  movement  will  not  increase  the  demand 
for  gold  unduly,  for  the  simple  reason  that  the  entire  monetary 
needs  of  these  countries  are  small.  The  monetary  demand  for 
that  metal  of  countries  already  on  the  gold  standard  is  likely, 
in  consequence  of  the  increased  use  of  credit  money  and  sub- 
stitutes for  money  that  seems  probable,  to  increase  in  coming 
years  at  a  somewhat  slower  rate  than  their  wealth  and  the  re- 
sulting number  of  exchange  transactions  to  be  effected.  Con- 
sidering the  two  sources  of  demand  together,  we  may  conclude 
with  some  confidence  that  the  monetary  demand  for  gold  is  not 
likely  to  increase  in  the  immediate  future — except  as  it  is 
affected  by  temporary  credit  disturbances — more  rapidly  than 
does  general  wealth. 

§  197.  The  reserve  demand  for  gold  includes  not  only  the  The 
demand  of  governments  which  have  to  provide  for  the  redemp-  j^g^and 
tion  of  their  token  and  credit  money  and  of  banking  institutions 
which  have  their  credit  obligations  to  meet,  but  also  the  demand 
of  individuals  who  wish  for  some  reason  to  have  by  them  a  store 
of  the  precious  metal.  This  demand  has  increased  even  more 
strikingly  in  the  last  thirty  years  than  the  monetary  demand 
for  the  reason  that  most  of  the  countries  which  have  established 
the  gold  standard  during  that  period,  have  contented  them- 
selves, as  has  the  United  States,  with  securing  sufficient  gold  to 
insure  the  convertibility  of  their  other  forms  of  money  without 
actually  withdrawing  these  from  circulation.  This  has  necessi- 
tated in  all  parts  of  the  world  the  accumulation  of  large  gold  re- 
serves. 

The  following  figures  give  the  gold  holdings  credited  to 
the  state  banks  of  different  countries  about  July  i.  1903:  Bank 


350     Some  Unsettled  Monetary  Problems 

of  France,  $503,000,000;  Bank  of  Russia,  $373,000,000;  Bank 
of  Austria,  $229,000,000;  Bank  of  England,  $184,000,000; 
Bank  of  Germany,  $130,000,000;  Bank  of  Italy,  $73,000,000; 
Bank  of  Spain,  $72,000,000;  Bank  of  Belgium,  $24,000,000; 
Bank  of  Holland,  $20,000,000.  The  United  States  Treasury 
held  on  the  same  date  some  $252,000,000  and  the  national 
banks  some  $300,000,000  in  gold.  These  gold  hoards,  which 
aggregated  over  $2,000,000,000,  represent  but  a  part  of  the 
world's  reserve  demand  for  gold,  as  they  include  neither  the 
government's  reserves  in  many  important  countries  nor  the  re- 
serves in  other  than  the  State  and  national  banks  mentioned. 
If  all  of  the  different  items  which  should  be  included  could  be 
exactly  calculated,  it  would  doubtless  be  found  that  the  reserve 
demand  for  gold  is  larger  than  either  of  the  other  demands. 
This  reserve  demand,  moreover,  is  likely  to  grow  relatively  to 
keep  pace  with  the  increasing  use  of  credit  as  a  medium  of  ex- 
change which  has  been  predicted.  The  time  may  indeed  come, 
as  it  has  already  in  the  eastern  cities  of  the  United  States,  when 
the  reserve  demand  for  gold  will  practically  supersede  the 
monetary  demand  because  the  universal  conviction  that  gold 
may  be  obtained  at  will  in  exchange  for  credit  money  will  cause 
no  one  to  want  it. 

Conclusion        To  sum  up  what  has  been  said  in  regard  to  the  demand  for 

in  RGfcr* 

ence  to  gold,  it  appears  that  the  arts  demand  is  highly  elastic  and  likely 

Demand  to  continue  so  for  some  time  to  come.  The  monetary  demand 
which  has  expanded  at  a  rapid  rate  during  the  last  thirty  years 
has  now  subsided  to  what  we  may  describe  as  its  normal  con- 
dition, in  consequence  of  the  fact  that  the  adoption  of  the  gold 
standard  by  the  commercial  world  is  an  accomplished  fact.  It 
is  likely  to  increase  in  future  years  somewhat  less  rapidly — 
at  least  after  the  final  steps  in  the  adoption  of  the  gold  standard 
as  the  standard  of  the  world  have  been  taken — than  the  volume 
of  exchange  work  to  be  done,  because  of  the  probable  increase 
in  the  use  that  will  be  made  of  credit  as  a  medium  of  exchange. 
The  reserve  demand  which,  too,  has  grown  enormously  during 
recent  years  has  also  attained,  at  present,  a  more  normal  con- 
dition. It  is  likely  to  increase  relatively  somewhat  more  than 
does  the  volume  of  exchange  work  to  be  done,  to  keep  pace  with 
the  increased  use  of  credit  that  is  anticipated.     Considering  all 


The  Supply  of  Gold  351 

three  forms  of  demand  together  we  may  conclude  that  the  de- 
mand for  gold  in  coming  years  is  likely  to  grow  at  about  the 
same  rate  as  the  world's  wealth,  but  that  it  will  be  subject  to 
violent  fluctuations  until  the  machinery  of  credit  is  so  perfected 
that  it  is  no  longer  liable  to  the  periodic  break-downs  wdiich 
were  so  common  during  the  last  century. 

§  198.  The  supply  of  gold  admits  of  more  exact  measurement  The  Supply 
than  the  demand  for  it.  According  to  different  authorities  the 
world's  stock  by  1850  equalled  between  $2,000,000,000  and 
$3,000,000,000.  The  production  since  that  date  has  amounted 
to  about  $7,000,000,000,  so  the  present  stock  is  probably  be- 
tween $9,000,000,000  and  $10,000,000,000.  The  history  of 
gold  production  since  1850  is  briefly  summarised  in  the  follow- 
ing statistics:  From  1851  to  i860  the  annual  production  aver- 
aged $132,000,000,  attaining  in  the  latter  year  the  value  of 
$134,000,000,  which  was  not  equalled  in  any  subsequent  year 
until  1892.  The  low^est  point  was  reached  in  the  early  eighties, 
since  when  there  has  been  a  fairly  steady  increase,  as  is  shown 
by  the  following  table : 

World's  Production  of  Gold* 

Annual  average,       1SS1-1885,  $102,000,000 

"             "                1SS6-1SQ0,  110,000,000 

"             "                1891-1895,  163,000,000 

"             '*                1896-1900,  261,000,000 

1901,  267,000,000 

1902,  305,000,000 

As  these  statistics  indicate,  the  production  of  gold  responded  Probable 
but  slightly  to  the  increased  monetary  and  reserve  demand  ofGoM 
prior  to  1890.     Since  that  date  the  response  has  been  increas-  Supply 
ingly  adequate.     The  largest  production  in  any  single  year  to 
date  ($315,000,000)   was  attained  in  1899  on  the  eve  of  the 
South  African  \\'ar,  but  there  is  every  indication  that  this 
record  will  be  surpassed  in  the  near  future  and  that  a  produc- 
tion of  from  $300,000,000  to  $400,000,000  a  year  will  be  main- 
tained at  least  during  the  present  decade.     What  is  even  more 
important  is  the   fact  that  the  production  of  gold  promises 

♦Compiled  from  table  in  the  Annual  Financial  Review  for  1903, 
p.  40. 


Measuring 
the  Value 
of  Money 
by  Method 
ot  Index 
Numbers 


352     Some  Unsettled  Monetary  Problems 

to  be  more  elastic,  that  is,  to  respond  more  readily  to  changes 
in  the  demand,  in  the  future  than  it  has  been  in  the  past.  Be- 
fore enlarging  on  this  point  it  will  be  well  to  consider  the 
changes  in  the  value  of  gold  that  have  actually  occurred  in  the 
recent  past. 

§  199.  The  value  of  money  is  measured,  as  is  the  value  of 
anything  else,  by  the  quantity  of  other  commodities  for  which 
it  will  exchange.  When  two  periods  are  to  be  compared  a 
difficulty  arises  because  the  value  of  money  will  be  found 
usually  to  have  changed  in  different  directions  as  regards  dif- 
ferent commodities.  This  is  avoided  by  the  method  of  index 
numbers.  To  illustrate  its  use,  suppose  that  wheat,  anthracite 
coal,  pig  iron,  cotton  cloth,  and  copper  be  taken  as  representa- 
tive of  all  commodities,  and  that  it  be  found  that  on  January 
I  of  a  certain  year  one  dollar  would  buy  one  bushel  of  wheat, 
one-fifth  of  a  ton  of  anthracite  coal,  one-twentieth  of  a  ton  of 
pig  iron,  twenty  yards  of  cotton  cloth,  and  ten  pounds  of  cop- 
per, while  on  January  i  of  another  year  a  dollar  would  com- 
mand three-fourths  of  a  bushel  of  wheat,  one-fourth  of  a  ton 
of  coal,  one-tenth  of  a  ton  of  pig  iron,  twenty-five  yards  of 
cloth,  and  five  pounds  of  copper.  Using  one  hundred  as  an 
index  number  for  the  different  commodities  w'e  should  write 
out  the  following  tables  for  the  two  dates : 


$5. 
or  $1. 


January  i,  first  year 
=   I   bushel  wheat  =  100 
=  i   ton  coal  —  100 

=  -2^    "    iron  =  100 

=  20  yards  cloth      =  100 
^^  10  pounds  copper  =  100 
=  SCO 


January  i,  second  j-ear 
$1.  =  I  bushel  wheat  ^    75 
=  \  ton  coal  =r  125 

=  y'^    "    iron  =  200 

=  25  yards  cloth       =  125 
=  5  pounds copper =    50 

$5.  =  =  575 

100    or  $1.  =  =115 


The  calculation  indicates  that  the  value  of  a  dollar  as  meas- 
ured in  these  five  commodities  increased  between  the  two  dates 
from  one  hundred  to  one  hundred  and  fifteen,  or  15  per  cent. 
By  extending  it  to  include  all  commodities,  we  could  obtain 
similar  averages  for  the  two  dates  that  would  seem  to  give  a 
comprehensive  view  of  any  change  in  the  value  of  money  that 
might  have  occurred  between  them. 


Price  Statistics  353 

This  method,  called  that  of  simple  averages,  is  open  to  the  Defects  in 
objection  that  it  treats  all  commodities  as  of  equal  importance 
in  their  influence  on  the  value  of  money.  It  is  obvious  that 
there  is  chance  of  error  when  such  diverse  goods  as  coal  and 
chewing  gum  are  each  given  the  same  index  number  for  the 
purpose  of  a  calculation.  To  avoid  this  three  ditterent  ex- 
pedients have  been  proposed :  ( i )  to  confine  the  calculation  to 
the  principal  commodities  which  figure  in  a  country's  trade  or 
consumption;  (2)  to  assign  difl:erent  index  numbers  to  differ- 
ent commodities,  "  weighted  "  so  as  to  correspond  to  their  dif- 
ferent degrees  of  importance;  (3)  to  repeat  important  com- 
modities in  dilTerent  forms  in  the  calculation  so  that  they  will 
have  greater  influence  on  the  result  than  unimportant  com- 
modities that  appear  but  once.  Space  will  not  permit  a  de- 
tailed consideration  of  the  merits  of  these  different  plans,  but 
it  may  be  said,  in  general,  that  experience  shows  that  little 
change  in  the  result  is  to  be  expected  from  their  use  and 
that  the  method  of  simple  averages  judiciously  employed  af- 
fords, perhaps,  as  accurate  conclusions  as  such  calculations 
admit  of. 

In  practice  it  is  customary  to  study  not  changes  in  the  value  Relation 
of  money,  but  changes  in  the  level  of  prices,  since  prices  are  y^j^^^g^^f 
more  readily  available.     The  latter  may  be  translated  into  the  I^Ioney  and 
former  by  means  of  a  simple  calculation  since,  as  already  ex-  prices 
plained,  they  are  in  reciprocal  relation  to  each  other.     To  give 
a  concrete  example,  suppose  that  a  study  of  prices  shows  a  rise 
of  25  per  cent,  in  the  general  level  during  a  given  period.     This 
signifies  that  commodities  which  formerly  cost  $i.OO  will  now 
cost  on  the  average  $1.25.     This  being  the  case,  $1.00  will  now 
purchase  only  four-fifths  as  much  as  it  would  before,  or  its 
value  will  have  fallen  one-fifth  or  20  per  cent. 

§  200.  During  the  last  fifty  years  several  elaborate  investi-  Price 
gations  have  been  made  designed  to  show  changes  in  the  gen- 
eral level  of  prices.  For  purpose  of  illustration  the  conclu- 
sions arrived  at  by  two  investigators.  Mr.  Sauerbeck,  whose 
figures  refer  to  English  prices,  and  Professor  Falkner,  whose 
data  were  American  prices,  are  represented  in  the  accompany- 
ing chart.  Mr.  Sauerbeck's  inquiry  embraces  45  principal 
commodities  and  Professor  Falkner's  223.     Wholesale  prices 


Reasons 
for  Fluc- 
tuations in 
Prices 


354     Some  Unsettled  Monetary  Problems 

were  used  in  both  cases  and  the  method  employed  was  that  of 
simple  averages.* 

A  study  of  this  chart  reveals  several  interesting  facts  in 
reference  to  the  movement  of  prices  since  i860.  Both  inves- 
tigations indicate  a  considerable  degree  of  variability  in  prices 
from  year  to  year.  Thus  Mr.  Sauerbeck's  index  number  fell 
from  105  in  1864  to  loi  in  1865;  from  1870  to  1871,  it  rose 
from  96  to  100,  and  from  that  to  109  in  1872;  it  fell  from  11 1 
to  102  from  1873  to  1874,  and  from  that  to  96  in  1875;  finally 
it  rose  from  68  in  1899  to  75  in  1900.  Professor  Falkner's  in- 
dex number  showed  even  more  violent  fluctuations :  from  1861 
to  1862  it  rose  from  100.6  to  114.9,  only  to  fall  back  to  102.4  in 
1863 ;  the  rise  in  1864  ^o  122.4  was  more  than  balanced  by  the 
fall  in  1865  to  100.3;  ^"^  this  but  prepared  the  way  for  a  rise 
in  1866  to  136.3  ;  subsequent  changes  were  less  violent,  but  from 
1867  to  1868  it  fell  from  127.9  to  115.9,  and  from  1875  to  1876 
from  1 13.4  to  104.8;  other  striking  changes  were  the  fall  from 
99.9  to  86.7  from  1878  to  1879,  and  that  from  86  to  79.3  from 
1883  to  1884.  These  sudden  changes  are  accounted  for  in 
most  cases  by  the  variable  use  that  was  made  of  credit  substi- 
tutes for  money  as  media  of  exchange,  complicated  in  the  case 
of  the  American  figures  by  the  disturbing  influence  of  the 
Civil  War  and  of  the  depreciated  paper  currency  which  was 
the  country's  medium  of  exchange  from  1861  to  1879.  In 
times  of  general  confidence  credit  plays  such  an  important  role 
in  business  that  there  is  little  monetary  demand  for  gold  and 
its  value  tends  to  fall — that  is,  gold  prices  tend  to  rise.  Loss 
of  confidence  always  causes  a  contraction  of  credit  and  an  in- 
creased demand  for  standard  money,  which  serves  to  enhance 
its  value  or  to  cause  prices  to  fall.  When  the  loss  of  confidence 
is  general,  as  it  was  in  1873  and  the  years  immediately  follow- 
ing, the  credit  contraction  is  violent  and  the  fall  in  prices  cor- 
respondingly severe.  Thus  the  use  of  credit,  which  in  ordinary 
times  is  the  source  of  so  much  benefit  to  the  commercial  world, 
becomes  in  times  of  disturbance  the  source  of  acute  distress  to 
all  business  men  who  have  learned  to  depend  upon  it. 

*  Professor  Falkner  also  used  the  method  of  weighted  averages. 
For  a  full  discussion  of  these  and  other  calculations,  see  Laughlin, 
Principles  of  Money,  Chapter  VI. 


CHANGES   IN   GOL 

Falkner's  Index  lumbers,  1860-1891. 

Scale                                                     (Prices  in  1860=100) 

(Falkner) 

137 
135 
135 
134 
133 
132 
131 
130 
129 
128 
127 
125 
125 
124 
123 
122 
121 
120 
119 
113 
1  1  7 
116 
1  15 

ri4 

113 

112 

1  1  1 

1  10 

109 

108 

107 

105 

105 

104 

.   103 

102 

101 

100 

99 

98 

97 

95 

95 

g4 

.93 

92 

91 

90 

89 

88 

87 

36. 

1860 

1861 

1862 

186.3 

1864 

186 

•S   1866 

186T 

1868 

1869 

1870 

1871 

1872 

1873 

1874 

1875 

1876 

1877 

1878  |l<: 

1 
1 

/ 

|i_ 

• 
k 

/ 

\ 

\ 

/ 

> 

t 

/ 

V 

{ 

/ 

V 

r'*\ 

t 

/ 

1 

/ 

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International  Bimetallism  355 

In  addition  to  the  yearly  fluctuations  recorded  in  the  chart,  The 
a   general   movement   is   discernible.     The   general   trend   of  ^^end^^ 
prices  represented  by  both  lines  is  upward  from  i860  to  1872  of  Prices 
or  1873,  and  downward  from  that  date  until  1886  or  1887.    The 
cause  of  the  latter  movement  may  with  confidence  be  ascribed 
to  the  greatly  increased  monetary  and  reserve  demand  for  gold 
during  this  period  and  the  failure  of  production  to  respond  in 
the  measure  that  the  situation  demanded.     The  fall  in  prices 
made  gold  mining  increasingly   profitable  and   was   checked 
after  1887  by  the  largely  increased  output  of  the  world's  gold 
mines.     When  the  extraordinary  demand  for  gold  due  to  the 
adoption  of  the  gold  standard  by  different  countries  was  satis- 
fied, prices  began  to  rise,  that  is,  the  value  of  gold  began  to 
fall,  and  this  has  been  the  general  trend  since  1896  or  1897. 

It  would  be  unsafe  to  base  any  exact  conclusions  upon  the  Statistics 
price  fluctuations  indicated  by  the  chart,  because  neither  one  of  ^  ° 
the  investigations  whose  results  it  records  is  free  from  errors. 
In  fact  it  is  doubtful  whether  the  statistical  method  has  yet 
been  perfected  to  a  point  which  makes  the  exact  measurement 
of  the  general  level  of  prices,  or  the  value  of  money,  possible. 
All  that  is  claimed  for  these  investigations  is  that  they  reflect 
those  general  tendencies  which  were  so  marked  as  to  overcome 
any  possible  margin  of  error  in  the  calculations  themselves. 

§  201.  The  adoption  of  the  single  gold  standard  was  vigor-  Inter- 
ously  opposed  not  only  in  the  United  States,  but  in  European  nfetallim^ 
countries,  on  the  ground  that  the  supply  of  gold  was  inadequate 
to  satisfy  the  needs  of  all  nations.  It  was  long  contended,  and 
is  still  by  many  thoughtful  persons,  that  a  much  better  mone- 
tary system  for  the  world  would  be  one  which  combined  both 
gold  and  silver.  Some  countries,  like  England  and  her  colonies, 
which  had  long  had  the  gold  standard  might  continue  on  that 
basis.  Others,  like  Mexico  and  China,  which  were  accustomed 
to  silver  only,  might  maintain  the  silver  standard.  The  best 
interests  of  all  would  be  served,  it  was  thought,  if  the  remain- 
ing countries  which  used  both  gold  and  silver  could  agree  upon 
some  scheme  of  "  international  bimetallism  "  which  Avould 
establish  a  fixed  value  ratio  between  gold  and  silver  and  insure 
their  continued  use  as  the  standard  money  materials  of  the 
world. 


The 

Time  for  it 

Probably 

Passed 


The  Silver 
Question 
in  the 
United 
States 


356     Some  Unsettled  Monetary  Problems 

For  a  time  it  seemed  as  though  the  fears  of  bimetallists  in 
reference  to  the  insufficiency  of  the  gold  supply  were  well 
grounded.  Gold  prices  did,  as  we  have  seen,  fall  with  alarm- 
ing persistency,  and  the  effect  of  the  steady  decline  on  the  tem- 
per of  the  business  community  was  decidedly  unfavourable.  If 
the  suggested  remedy  could  have  been  applied  in  1873,  the 
results  might  have  been  generally  beneficial.  Nothing  was 
done,  however,  notwithstanding  repeated  international  confer- 
ences, and  after  1896,  when  gold  prices  began  to  rise  again, 
the  principal  reason  for  action  was  removed.  At  present  it 
is  the  general  consensus  of  opinion  that  "  international  bimet- 
allism," even  if  economically  and  politically  practicable,  is  no 
longer  needed  and  that  any  international  agreement  that  is 
made  should  have  for  its  object  the  extension  of  the  gold  stand- 
ard to  the  few  countries  that  are  still  on  silver  and  paper  bases, 
with  a  view  to  giving  greater  stability  to  foreign  exchange 
relations.  In  other  words,  gold  has  been  accepted  as  the  stand- 
ard of  value  of  the  world,  and  the  monetary  problem  of  con- 
temporary interest  is  how  to  extend  this  standard  to  countries 
which  for  special  reasons  do  not  care  to  make  gold  coin,  even 
on  a  limited  scale,  their  medium  of  exchange.  The  Govern- 
ment of  India  has  solved  this  problem  by  acquiring  a  sufficient 
gold  reserve  to  permit  the  sale  at  a  fixed  price  in  silver  of 
English  exchange,  which  represents  gold,  and  by  having  the 
mint  issue  silver  coins  in  exchange  for  gold  on  demand.  By 
these  means  the  convertibility  of  silver  coin  into  gold  at  a 
fixed  ratio  is  constantly  maintained,  and  there  seems  no  reason 
why  a  similar  policy  might  not  be  adopted,  by  means  perhaps 
of  international  agreement,  by  other  countries  preferring  silver 
or  paper  as  their  media  of  exchange. 

§  202.  In  the  United  States  the  agitation  for  bimetallism 
assumed  a  more  radical  form  than  in  Europe,  the  demand 
being  made  that  the  country  embark  alone  upon  the  attempt 
to  maintain  a  constant  value  ratio  beween  gold  and  silver 
by  throwing  its  mints  open  to  the  free  coinage  of  the  latter 
metal  at  the  mint  ratio  of  16  to  i.  This  was  made  the 
dominant  issue  in  the  presidential  campaign  of  1896,  when 
the  Republicans  opposed  to  the  Democratic  declaration  in 
favour  of  free  coinage  a   somewhat  vague  endorsement  of 


The  Free  Coinage  of  Silver  357 

international  bimetallism.  Again  in  1900  free  coinage  was  an 
issue,  but  already  the  reasons  for  the  agitation  had  been  with- 
drawn and  there  seems  little  likelihood  of  a  revival  of  the 
question,  at  least  in  the  same  form.  So  fast  has  history  been 
made  in  this  field  that  what  was  but  yesterday  a  burning 
political  issue  is  now  a  question  of  merely  academic  interest. 
It  seems  worth  while,  nevertheless,  to  consider  very  briefly 
the  probable  consequences  of  the  free  coinage  of  silver,  should 
such  a  policy  be  adopted. 

Since  present  credit  relations  are  based  on  the  gold  standard,  The 
there  can  be  no  doubt  that  the  first  effect  of  the  proposed  Conse-  ^ 
policy  would  be  a  credit  panic  of  unprecedented  proportions,  quences  of 

the  FrGS 

Fear  that  credit  obligations  would  be  met  in  depreciated  money  Coinage 
would  cause  all  who  have  demand  claims  against  others,  to  oi  Silver 
present  them.  Bank  depositors  would  besiege  the  institutions 
to  which  they  had  entrusted  their  savings  and  the  latter  would 
be  forced  to  suspend  payments.  At  the  same  time  every  intel- 
ligent possessor  of  gold  w^ould  decline  to  use  it  as  money  in 
the  anticipation  that  it  would  go  to  a  premium,  and  bankers 
and  bullion  brokers  who  did  not  have  gold  would  hasten  to 
secure  it  from  the  United  States  Treasury  by  presenting  United 
States  notes  for  redemption.  Should  the  Government  decline 
to  pay  out  gold  for  its  demand  notes,  gold  would  at  once  go  to 
a  premium.  Should  it  pursue  the  other  course,  its  gold  reserve 
would  soon  be  exhausted  and  the  situation  would  then  be 
beyond  its  control.  Meantime  the  ofifer  to  convert  silver  bull- 
ion, worth  at  the  outset  less  than  fifty  cents  in  gold,  into  dollars 
every  whit  as  good  as  gold  coin,  w^ould  cause  streams  of  silver 
to  pour  towards  the  United  States  mints  from  every  quarter. 
The  immediate  efifect  of  the  policy  would  be  to  enhance  the  gold 
price  of  silver.  Whether  this  enhancement  would  be  sufficient 
to  alter  the  present  commercial  ratio  of  i  to  324-  to  the  mint 
ratio  of  I  to  16  and  hold  it  there,  is  the  crux  of  the  whole  ques- 
tion. On  this  point  opinions  differ  widely,  and  there  is  no  way 
of  deciding  the  issue  because  only  experience  could  demonstrate 
how  large  a  part  of  the  world's  stock  of  silver  would  be  con- 
verted into  coin  on  such  favourable  terms  by  its  present  holders. 
Doubtless  there  is  much  truth  in  the  contention  of  bimetallists 
that  the  greater  part  of  the  silver  in  existence  has  already  been 


358     Some  Unsettled  Monetary  Problems 

enhanced  in  value  by  the  art  of  silversmiths  more  than  it  would 
be  by  the  new  coinage  policy  of  the  United  States,  and  that  it 
would  not  occur  to  the  owners  of  such  silver  to  convert  it  into 
bullion  even  if  the  gold  price  of  the  latter  was  trebled  instead 
of  doubled.  On  the  other  hand,  it  is  equally  certain  that  a  very 
large  amount  of  silver  is  preserved  in  forms  that  add  little  to 
the  value  of  their  bullion  contents.  When  it  is  recalled  that 
,  the  total  gold  monetary  stock  of  the  United  States  ($1,250,- 

000,000)  could  be  replaced  by  silver  in  less  than  six  years  if 
the  entire  product  of  the  world's  mines  were  coined  into  dol- 
lars, and  when  it  is  considered  what  a  stimulus  silver  mining 
would  receive  if  the  gold  price  of  the  metal  were  suddenly 
doubled,  it  must  appear  doubtful  if  the  mint  ratio  could  even 
temporarily  be  made  the  world's  commercial  ratio  and  even 
more  doubtful  if  this  relation  could  be  maintained.  In  the 
opinion  of  the  writer,  probability,  so  strong  as  to  amount  al- 
most to  certainty,  points  to  the  conclusion  that  the  free  coin- 
age of  silver  would  mean  for  the  United  States  the  single  silver 
standard  and  a  dollar  worth  considerably  less  than  the  present 
gold  dollar.  If  this  view  is  correct,  arguments  based  on  the 
alleged  advantages  of  bimetallism  have  little  bearing  on  the 
silver  issue  as  it  has  presented  itself  in  the  United  States.  The 
alternative  was  between  the  gold  standard  and  the  silver  stand- 
ard, and  events  have  already  shown  the  wisdom  of  the  decision 
arrived  at  in  the  summer  of  1896,  to  adhere  to  the  former. 
The  Future  §  203.  The  future  of  the  gold  standard  hinges  upon  the  ques- 
Standard  tions  whether  the  value  of  gold  is  likely  to  show  a  fair  degree 
of  stability  in  coming  years,  and  whether  any  more  stable  stand- 
ard which  is  equally  convenient  in  other  respects  is  attainable. 

As  to  the  first  point,  present  indications  are  believed  to  be 
very  favourable.  The  transition  to  the  gold  standard  has  been 
accomplished,  or  is  in  a  fair  way  to  be  accomplished  in  the 
near  future,  for  the  whole  commercial  world.  Under  these 
circumstances  there  is  every  reason  to  anticipate  only  that  grad- 
ual increase  in  the  world's  demand  for  gold  that  will  result 
from  the  gradual  growth  of  the  world's  wealth  and  expansion 
of  its  exchange  transactions.  On  the  side  of  supply,  produc- 
tion in  the  near  future  promises  not  only  to  be  ample,  but  to  be 
governed  more  exactly  by  the  normal  cost  of  production  than  it 


The  Multiple  Standard  359 

€ver  has  been  in  tlie  past.  Discoveries  of  new  sources  of  supply 
and  inventions  affecting  methods  of  mining  and  refining  have, 
during  the  last  ten  years,  advanced  gold  production  in  many 
parts  of  the  world  to  the  precision  of  a  manufacturing  indus- 
try. In  quartz  mining  in  the  Rand  district  in  South  Africa 
and  in  placer  mining  in  the  low-grade  gold-bearing  soils,  which 
it  is  now  profitable  to  treat  by  means  of  expensive  hydraulic 
appliances,  the  cost  of  production  of  gold  can  be  accurately 
estimated  and  the  output  can  be  increased  or  decreased  on  a 
considerable  scale  as  changes  in  the  value  of  the  product 
make  either  course  desirable.  Thus  the  normal  cost  of  pro- 
duction promises  to-be  the  regulator  of  the  value  of  gold  in  the 
future,  as  it  has  been  of  other  freely  reproducible  goods  in  the 
past.  This  normal  cost  of  production  may  not  change  at 
exactly  the  same  rate  as  does  the  normal  cost  of  producing 
commodities  generally,  but  there  seems  to  be  good  reason 
for  believing  that,  in  any  case,  it  will  change  but  gradually 
and  that  a  fair  degree  of  stability  of  value  will  consequently  be 
maintained. 

§  204.  Those  who  believe  that  the  gold  standard  will  one  The 
day  be  superseded  base  their  faith,  not  on  any  alleged  ad-  cV^'^!/'  ^i 
vantage  of  some  other  commodity  standard  of  value,  but  upon 
dissatisfaction  with  all  commodity  standards.  Perfect  stability 
of  value  is  certainly  unattainable  along  this  line.  The  remedy 
suggested  is  the  adoption  of  an  immaterial  standard,  called  the 
"  multiple  standard,"  whose  value  may  be  kept  uniform  by  arti- 
ficial regulation.  The  plan  is  somewhat  as  follows :  Since 
the  value  of  the  monetary  unit  is  detenriined  by  the  relation 
between  demand  and  supply,  and  since  paper  money  is  the 
medium  of  exchange  preferred  in  the  most  advanced  countries, 
let  each  Government  take  upon  itself  the  regulation  of  its 
monetary  system  and  substitute  fiat  for  self -regulating  money. 
Let  a  special  department  of  issue  and  redemption  be  created 
to  adjust  the  supply  of  such  money  to  the  demand  for  it  in  such 
a  way  that  the  general  level  of  prices  shall  be  kept  uniform 
from  month  to  month  and  year  to  year.  This  may  be  done, 
it  is  suggested,  by  issuing  additional  legal-tender  paper  notes 
as  prices  tend  to  fall  and  withdrawing  such  notes — perhaps 
by  the  sale  of  low  interest-bearing  bonds — as  prices  rise.    The 


360     Some  Unsettled  Monetary  Problems 

measurement  of  prices  might  be  made  by  means  of  index  num- 
bers in  some  such  way  as  was  described  in  a  previous  section 
and  the  effort  would  be  to  keep  the  index  number  constantly 
at  100. 

Space  will  not  permit  discussion  of  the  possibilities  of  a  fiat, 
multiple-standard  monetary  system.  There  is,  perhaps,  no 
good  theoretical  reason  for  maintaining  that  such  a  system 
could  not  work  in  a  world  that  was  politically  and  commercially 
ready  for  it.  On  the  other  hand,  no  extended  argument  is 
necessary  to  show  that  at  the  present  time  the  plan  must  be 
dismissed  as  impracticable,  especially  as  there  are  grounds 
for  doubting  whether  it  would  prove,  in'  operation,  as  satis- 
factory as  the  single  gold  standard  promises  to  be  for  the 
immediate  future. 

REFERENCES  FOR   COLLATERAL  READING 

The  influences  which  determine  the  value  of  money  are  discussed 
with  admirable  clearness  in  *J.  F.  Johnson's  Synopsis  of  Lectures 
on  Finance  (Lectures  IL-VL).  With  this  should  be  compared  the 
chapters  on  "The  Quantity  Theory"  in  LaughlMs  Principles  of 
Money,  and  Scott's  Money  and  Banking,  in  which  contrary  views 
are  expressed.  The  most  exhaustive  discussion  of  the  Measure- 
ment of  General  Exchange  Value  is  in  the  work  bearing  that  title 
by  IVals/u  See  also,  *Jevons,  Studies  in  Currency  and  Finance, 
and  Falkner,  Report  of  Finance  Committee  of  the  Senate  on  Whole- 
sale Prices  (1893).  References  for  other  topics  considered  in  the 
chapter  are:     *  Taussig,  Silver  Situation  in    the   United    States; 

*  Walker,     International     Bimetallism  ;     Darwin,       Bimetallism  ; 

*  Sound  Currency  Redbook  (published  by  Committee  of  New  York 
Reform  Club)  ;  Russell,  International  Monetary  Conferences, 


CHAPTER  XX 
FOREIGN  EXCHANGE  AND  THE    TARIFF   QUESTION 

§  205.  In  foreign  as  well  as  domestic  trade  credit  now  serves  The 
as  the  principal  medium  of  exchange.     Those  who  purchase  pqj.^\^j^ 
goods  from  abroad  pay  for  them  by  buying  drafts,  or  post-  Exchange 
office,  express,  or  cable  money  orders  and  sending  the  latter  to 
the  foreign  seller,  or  by  permitting  the  foreign  seller  to  draw  on 
them  by  means  of  drafts,  or  bills  of  exchange,  for  the  sums  due. 
Orders  for  the  payment  of  money  in  a  foreign  country  are 
called    "  foreign  exchange,"   and   the   buying  and   selling  of 
such  exchange  is,  as  already  suggested,  an  important  part  of  the 
business  of  a  modern  city  bank.    A  description  of  the  factors 
that  enter  into  this  business  as  it  is  conducted  between  the 
United  States  and  the  Uiiited  Kingdom  will  serve  to  introduce 
a  discussion  of  some  of  its  more  general  aspects. 

Anglo-American  trade  now  includes  as  varied  transactions  Anglo- 

as  the  trade  between  different  sections  of  either  countrv.     In  American 

Trade 
addition  to  commodities,  stocks,  bonds,  and  other  securities  are 

constantly  dealt  in  between  the  two  countries;  profits,  rents, 
interest,  and  even  wages  are  transmitted ;  freight  charges  are 
paid ;  travellers  abroad  receive  remittances  from  home,  and 
finally  bankers'  loans  are  exchanged.  If  these  different  trans- 
actions be  looked  at  from  the  point  of  view  of  one  of  the  coun- 
tries, say,  of  the  United  States,  they  arrange  themselves  under 
two  heads :  those  involving  payments  to  the  country  and  those 
involving  payments  by  the  country.  The  first  may  be  thought 
of  as  credits  acquired  by  the  United  States.  These  arise  from 
sales  of  commodities  or  securities,  from  payments  in  the  way 
of  profits,  rents,  interest,  or  wages  due  to  Americans  from  the 
United  Kingdom,  from  the  expenditures  of  Englishmen  in  the 
United  States,  and  finally  from  loans  by  English  to  American 
bankers.  The  second  may  be  described  as  debts,  and  arise 
from  the  opposite  transactions,  c.  g.,  purchases  of  commodities 
or  securities,  loans  to  English  bankers,  etc. 

3(ii 


Sterling 
Exchange 


The  Gold 
Points 


362        Foreign  Exchange  and  the  Tariff 

For  reasons  which  need  not  be  enlarged  upon,  the  custom  has 
arisen  of  making  London  the  clearing  house  for  the  credit 
instruments  used  in  connection  with  foreign  trade.  Americans 
having  payments  to  make  in  England  usually  buy  drafts  pay- 
able in  London  and  transmit  them  to  their  creditors,  Ameri- 
cans who  are  creditors  of  Englishmen,  on  the  other  hand, 
usually  draw  drafts  or  bills  of  exchange,  payable  in  London, 
upon  their  debtors,  in  preference  to  waiting  for  the  latter  to 
remit.  They  sell  these  to  bankers,  who  send  them  to  their 
correspondents  in  London  for  collection.  Orders  for  money 
payable  in  London  are  known  as  "  sterling  exchange  "  because 
they  call  for  pounds  sterling.  If  the  orders  for  payments 
to  English  creditors  are  exactly  offset  by  the  orders  for  pay- 
ments by  English  debtors,  the  credit  instruments  which  arise 
in  connection  with  the  various  transactions  described  will  just 
balance  each  other  when  they  come  together  in  London  and  no 
other  medium  of  exchange  than  credit  will  be  required.  This 
outcome,  where  transactions  are  so  vast,  is,  of  course,  very 
unusual.  It  more  frequently  happens  that  there  is  a  balance 
either  on  the  credit  or  on  the  debit  side  to  be  liquidated  by 
means  of  some  further  transaction. 

§  206.  The  price  which  American  bankers  ask  for  sterling 
exchange  varies  about  $4,862/^  pej-  pound  sterling,  which  is  the 
equivalent  in  the  gold  coinage  system  of  the  United  States  of 
the  pound  sterling  in  the  gold  coinage  system  of  the  United 
Kingdom.*  In  consequence  of  the  system  of  free  and  gratui- 
tous coinage  in  each  country,  $4.86  Yz  in  American  gold  coin  is 
worth  (approximately)  a  pound  sterling  in  the  United  King- 
dom, while  a  sovereign  of  full  weight  is  worth  $4.86  ^  in  the 
United  States.  The  price  of  sterling  exchange  never  departs 
far  from  $4.86?^,  which  we  may  call  "par,"  for  the  simple 
reason  that  one  alternative  to  employing  sterling  exchange  as 
a  means  of  payment  is  to  ship  gold,  and  this  becomes  profitable 
as  soon  as  the  price  or  rate  departs  from  par  sufficiently  to 
cover  the  expense  of  shipment,  which  is  now  less  than  three 
cents  a  pound  sterling,  including  freight  and  insurance.  When 

♦The  sovereign  (the  gold  coin  corresponding  to  the  pound)  contains 
113. 001  grains  of  pure  gold.  Dividing  this  by  23.22,  the  gold  contents 
of  the  American  dollar,  we  get  $4,865^. 


The  Rate  of  Sterling  Exchange         363 

the  price  rises  above  $4.86 ^^3  by  three  cents  it  becomes  cheaper 
to  remit  bullion  to  London  than  to  pay  the  premium.  In  prac- 
tice, business  men  do  not  have  to  bother  to  remit,  because  com- 
petition between  international  bankers  and  bullion  brokers 
causes  gold  to  go  out  in  anticipation  of  the  high  premium  and 
the  latter  are  willing  to  sell  exchange,  based  on  the  bullion 
shipped,  for  such  a  small  margin  of  profit,  that  shipments  in 
small  lots  never  pay.  If  the  price  of  sterling  fall  below  $4.86^ 
by  three  cents,  it  is  more  profitable  for  those  having  credit 
balances  due  in  London  to  import  the  bullion  for  which  these 
call.  Competition  among  bullion  brokers  again  insures  a  con- 
stant demand  for  good  bills  calling  for  payment  in  London  at 
a  minimum  price  of  three  cents  below  par,  and  relieves  other 
business  men  of  the  trouble  of  importing  gold.  The  limiting 
prices  between  which  sterling  exchange  fluctuates  are  known 
among  bullion  brokers  as  the  "  gold  points,"  the  lower  price 
resulting  always  in  the  shipment  of  gold  to  the  United  States, 
the  upper  in  its  shipment  from  the  United  States. 

§  207.  The  rate  of  sterling  exchange  is  determined  from  day  The  Rate 

to  dav  bv  the  relation  between  the  demand  for  it  and  its  supply.  °^  Sterling 
-      -  .  ,  I  t"  J  ■   Exchange 

All  of  the  transactions  which  have  been  enumerated  as  belong- 
ing on  the  debit  side,  from  the  point  of  view  of  the  United 
States,  give  rise  to  a  demand  for  sterling.  The  supply  comes 
from  the  transactions  enumerated  on  the  credit  side.  Interna- 
tional bankers  and  others  who  buy  and  sell  foreign  exchange 
try  to  adjust  the  rate  so  that  the  demand  and  supply  will  just 
ofifset  each  other.  Excess  on  the  side  of  supply  causes  the  rate 
to  fall,  the  limit  being  the  lower  gold  point,  at  which  credit  is 
abandoned  as  a  medium  of  exchange  and  gold  is  used  instead. 
Excess  on  the  side  of  demand  causes  the  rate  to  rise,  the  limit 
here  being  the  upper  gold  point,  at  which  credit  again  is  dis- 
carded and  gold  used.  Gold  thus  serves  as  the  medium  in 
which  international  balances  are  settled  when  debits  and  credits 
do  not  exactly  ofifset  each  other. 

Among  the  transactions  which  give  rise  to  debits  and  credits  The  Rate 
the  most  sensitive  are  those  we  have  characterised  as  bankers'  ^li"^^^^^*^ 
loans,     Anglo-American  banking  houses,  of  which  there  are  Foreign 
many,  divide  their  banking  capital  between  London  and  New  ^^^^^^°g« 
York.     Self-interest  leads  them  to  keep  the  major  part  of  this 


64       Foreign  Exchange  and  the  Tariff 


Prices  of 
Stocks  and 
Foreign 
Exchange 


Prices  of 
Commodi- 
ties and 
Foreign 
Exchange 


capital  and  of  their  entire  loanable  funds  at  that  centre  in  which 
the  higher  rate  of  interest  prevails.  Suppose  that  for  a  time 
this  centre  happens  to  be  New  York — as  it  usually  is.  To  take 
advantage  of  the  high  rate,  bankers  will  wish  to  transfer  their 
funds  from  London  to  the  more  profitable  loan  market.  They 
will  do  this  most  cheaply  by  selling  drafts  on  London  so  long 
as  they  can  get  a  price  for  these  drafts  above  the  lower  gold 
point.  A  rising  rate  of  interest  in  New  York  thus  serves  to 
attract  loanable  funds  from  abroad,  and  these  add  to  the  supply 
of  sterling  bills.  This  cause  may  serve  to  add  so  largely  to  the 
supply  that  the  rate  of  exchange  is  forced  down  to  the  lower 
gold  point  and  a  part  of  the  transfer  is  effected  by  means  of  a 
shipment  of  gold.  In  fact,  the  Bank  of  England  and  the  state 
banks  of  other  countries  which  are  in  a  position  to  control  the 
bank  rate  of  interest  commonly  secure  gold  when  they  want  it 
by  raising  their  rates  of  discount  until  the  rate  of  exchange 
is  brought  to  the  gold  import  point. 

A  rising  rate  of  interest  in  New  York  tends  to  add  in  still 
another  way  to  the  supply  of  sterling  bills.  An  important  item 
in  the  loan  business  of  New  York  banks  is  loans  to  speculators 
and  stock-brokers  who  invest  the  sums  borrowed  in  stocks  and 
bonds  in  the  expectation  of  selling  them  at  a  profit.  As 
the  rate  of  interest  rises  the  prospect  of  profit  from  purchasing 
securities  with  borrowed  money  is  reduced.  This  lessens  the 
demand  for  such  securities,  and  thus  tends  to  lower  the  prices 
at  which  they  sell.  One  probable  effect  of  lower  prices  for 
securities  is  increased  purchases  on  foreign  account,  and  all 
such  purchases,  of  course,  add  to  the  supply  of  sterling  bills. 

More  important  in  their  aggregate  effect,  although  less  sensi- 
tive to  temporary  fluctuations  in  the  rate  of  interest,  are 
changes  in  the  prices  of  the  commodities  that  enter  into  foreign 
trade.  Falling  prices  in  the  United  States  attract  foreign 
buyers  and  their  purchases  add  to  the  supply  of  sterling  bills. 
Rising  prices  not  only  discourage  foreign  purchases,  but 
stimulate  purchases  from  abroad  on  the  part  of  Americans, 
thus  adding  to  the  demand  for  bills.  The  three  influences 
mentioned — changes  in  bank  rates  of  interest,  changes  in  the 
prices  of  securities,  and  changes  in  the  prices  of  commodities — 
are  not  the  only  ones  that  affect  demand  and  supply  in  rela- 


Three-cornered  Exchanges  365 

tion  to  sterling  exchange,  but  they  are  so  much  more  im- 
portant than  any  others  that  the  latter  may  be  neglected. 

§  208.  The  preceding  discussion  referring  to  sterling  ex-  Ways  of 
change  applies  also  to  French,  German,  or  any  other  species  of  foreign 
foreign  exchange  in  which  the  United  States  happens  to  be  Exchange 
interested.  There  is,  however,  one  circumstance  that  deserves 
notice  because  it  is  apt  to  cause  confusion.  The  rate  for  foreign 
exchange  between  two  countries  may  properly  be  quoted  in 
terms  of  the  currency  of  either.  English  or  sterling  exchange 
is  habitually  quoted  in  terms  of  American  money.  French 
exchange,  on  the  contrary,  is  usually  quoted  in  Xew  York  in 
terms  of  French  money,  that  is,  the  number  of  francs  and  cen- 
times corresponding  to  an  American  dollar.  Sterling  exchange, 
as  we  have  seen,  is  high  or  dear  in  the  United  States  when  it 
is  above  par  and  low  or  cheap  when  it  is  below  par.  French 
exchange,  because  quoted  in  French  money,  is  high  or  dear 
when  below  par  and  low  or  cheap  when  above  par.  As  French 
exchange  rises  the  dollar  becomes  worth  more  francs  or  an 
order  for  francs  in  Paris  becomes  cheaper.  Conversely,  as  it 
falls,  an  order  for  francs  becomes  dearer.  It  follows  that 
whereas  sterling  exchange  rises  towards  the  point  which 
makes  the  exportation  of  gold  profitable,  French  exchange 
falls  towards  that  point  and  vice  versa.  In  London,  American 
exchange  is  usually  quoted  in  American  money,  that  is,  as 
sterling  exchange.  Consequently,  from  the  English  point  of 
view  a  high  rate  for  sterling  means  cheap  exchange  and  the 
prospect  of  gold  importation,  or  just  the  reverse  of  what  it 
means  from  the  American  point  of  view. 

It  is  important  to  remember  this  complication  in  practice,  Three- 
because  the  transactions  of  a  country  in  different  kinds  of  for-  E^^h^nces 
eign  exchange  are  intimately  related.  Credit  is  so  much  more 
economical  than  bullion  as  a  medium  of  exchange  that  the  latter 
is  only  shipped  after  all  of  the  resources  of  credit  have  been 
exhausted.  In  the  case  of  the  United  States  some  branches  of 
its  trade,  as,  for  example,  its  trade  with  Brazil,  call  habitually 
for  payments  that  are  not  offset  by  credits  acquired  in  that 
country  by  Americans.  Nevertheless,  bullion  is  rarely  shipped 
from  the  United  States  to  Brazil,  because  it  is  quite  as  satisfac- 
tory to  Brazilian  bankers  to  receive  sterling  bills  which  add  to 


366        Foreign  Exchange  and  the  Tariff 

their  credits  in  London,  and  on  the  basis  of  which  they  can 
sell  drafts  to  Brazilian  importers  from  Europe.    Thus  a  three- 
cornered  exchange  of  credit  instruments  serves  to  adjust  bal- 
ances, which  would  otherwise  necessitate  the  shipment  of  gold 
back  and  forth  across  the  Atlantic. 
Exchanges        Another  complication  arises  in  connection  with  foreign  ex- 
Gold  and      change  when  the  monetary  systems  of  the  countries  considered 
Silver  are  not  based  on  the  same  standard.      Between  the  United 

Countries  States  with  its  gold  standard,  and  Mexico  with  its  silver,  or  the 
Argentine  Republic  with  its  paper  standard,  there  is  no  fixed 
par  of  exchange.  The  general  principles  regulating  rates  of 
exchange  are  the  same  in  such  cases  as  for  two  countries  with 
the  gold  standard,  but  the  range  within  which  such  rates  may 
fluctuate  admits  of  no  precise  definition.  This  is  an  incon- 
venience that  will  be  avoided  only  when  the  gold  standard  has 
been  universally  adopted. 
ACountry's  §  209.  The  importation  or  exportation  of  gold,  which  is  the 
Supply         resort  to  which  international  bankers  must  have  recourse  when 

Regulates     foreign  credits  and  debits  can  be  balanced  by  no  cheaper  means, 
Itself 

causes  a  continuous  redistribution  of  the  world's  supply  of  that 

metal.  The  last  and  most  important  point  to  note  in  the  theory 
of  foreign  exchange  is  that  this  distribution  is  self-regulating 
and  always  gives  to  each  country  that  proportionate  share  of 
gold  which  is  needed  to  keep  its  rate  of  interest  and  level  of 
prices  in  their  normal  relation  to  those  of  other  countries.  Sup- 
pose the  cause  of  the  movement  of  gold  from  one  country  to 
another  is  a  rising  bank  rate  of  interest  in  the  latter.  As  gold 
pours  in  and  is  added  to  bank  reserves  it  will  tend  to  check 
such  a  rise,  and  meantime  bank  rates  abroad,  where  bank 
reserves  have  been  depleted,  will  tend  to  rise  to  re-establish  the 
normal  relation.  If  the  cause  of  the  higher  rate  in  the  gold-im- 
porting country  was  some  temporary  demand  for  bank  loans, 
bankers  will  find  their  reserves  too  large  when  the  emergency 
has  passed,  and  will  lower  their  rate  of  interest  to  attract  bor- 
rowers. Before  this  process  has  gone  far,  an  exportation  of 
gold  will  be  likely  to  set  in  to  re-establish  the  balance.  Sup- 
pose, again,  that  the  importation  of  gold  has  been  induced  by 
the  low  prices  at  which  commodities  are  being  sold  in  the 
importing  country.     Such  importation  will  before  long  itself 


The  United  States  Exports  Gold        367 

cause  prices  to  rise,  there  being  more  money  to  serve  as  a 

medium  of  exchange  than  before,  while  the  withdrawal  of  gold 

from  other  countries  will  in  time  cause  their  prices  to  fall. 

These  results  will  follow  the  more  promptly  because  ordinarily 

the  new  gold  will  find  its  way  into  bank  reserves  and  will  add 

to  the  use  of  credit  as  a  medium  of  exchange  much  more 

largely  than  it  adds  to  the  country's  supply  of  standard  money. 

In  the  same  way  its  exportation  will  serve  ordinarily  to  reduce 

bank  reserves  and  to  cause  a  contraction  of  credit  that  will 

lessen  the  supply  of  media  of  exchange  by  much  more  than  the 

amount  of  gold  lost.     By  these  means  the  movement  of  gold 

in  one  direction  is  soon  checked  with  every  likelihood  that  a 

counter   movement    will    follow,   unless   the   new    distribution 

proves   permanently    satisfactory   because   of   some    increased 

need  on  the  part  of  the  importing  country. 

It  follows  from  the  above  considerations  that  the  importation  The 

or  exportation  of  gold  is  not  a  matter  of  any  special  importance  states 

either  to  the  business  community  or  to  the  government  unless  Should 

,  .   '  .  1  1-  •  rr  Normally 

a  country  s  monetary  system  is  m  an  unsound  condition,     it  Export 

gold  is  leaving  a  country,  as  it  left  the  United  States  in  1893,  Gold 
because  its  place  is  being  taken  by  an  excessive  issue  of  credit 
money,  grave  uneasiness  may  well  be  felt.  If,  on  the  other 
hand,  it  is  being  imported  because  of  a  violent  contraction  of 
credit  that  has  suddenly  increased  the  demand  for  legal  money 
as  a  means  of  payment,  there  is  again  ground  for  anxiety. 
Experience  of  movements  of  gold  excited  by  causes  like  these 
has  led  American  business  men  to  attach  exaggerated  impor- 
tance to  this  phenomenon  even  when  the  reasons  for  it  are  per- 
fectly normal.  There  is  widespread  belief,  inherited  from  the 
mercantilists  of  the  eighteenth  century,  that  to  gain  gold  is  an 
advantage  and  to  lose  it  a  disaster.  Even  in  countries  which 
produce  no  gold  themselves  there  is  no  basis  for  this  belief. 
They  can  count  confidently  on  retaining  their  proportionate 
share  of  the  world's  gold  so  long  as  their  money  and  credit 
systems  are  sound.  For  a  country  like  the  United  States, 
which  contributes  each  year  more  than  one-fourth  of  the  total 
addition  to  the  world's  gold  supply,  the  belief  is  just  the 
reverse  of  the  fact.  The  normal  condition  for  the  United 
States  is  to  export  a  part  of  its  gold,  as  it  exports  part  of  its 


Foreign 

and 

Domestic 

Trade 

Compared 


Peculiari- 
ties  of 
Foreign 
Trade 


368        Foreign  Exchange  and  the  Tariff 

cotton  or  wheat.  If  it  fails  to  do  so,  the  cause  is  hkely  to  be 
found  in  some  defect  in  the  credit  or  monetary  system  which 
compels  the  country  to  retain  more  gold  than  is  economical  or 
desirable. 

§  210.  The  difference  between  foreign  and  domestic  trade  is 
a  dift'erence  of  degree  only.  It  happens  that  the  continent  of 
Europe  is  divided  up  between  more  than  a  dozen  different  sov- 
ereignties, and  this  causes  trade  between  its  different  sections 
to  be  largely  foreign.  On  the  continent  of  North  America,  on 
the  other  hand,  it  happens  that  only  three  sovereignties  are 
represented.  Of  these  the  United  States  alone  controls  an 
area  nearly  as  large  as  the  continent  of  Europe  and  presenting 
equally  striking  diversities  of  soil  and  climate.  Trade  between 
different  sections  of  the  United  States  is  domestic,  and  yet  the 
same  considerations  which,  for  example,  cause  California  to 
produce  oranges,  lemons,  and  olives  for  the  rest  of  the  country, 
cause  Italy  to  produce  the  same  things  for  the  rest  of  Europe. 
In  both  instances  trade  results  from  the  efforts  of  men  to  realise 
the  economies  connected  with  a  territorial  division  of  labour, 
that  is,  to  devote  each  particular  area  to  those  products  for 
which  it  is  best  adapted,  while  securing  from  other  areas  by 
means  of  exchange  their  special  products. 

Although  foreign  and  domestic  trade  are  thus  controlled  at 
bottom  by  identical  principles,  economists  are  in  the  habit  of 
singling  out  the  former  for  special  treatment,  partly  because  it 
is  frequently  subjected  to  regulations  from  which  the  latter  is 
exempt,  and  partly  because  back  of  these  regulations  are  dif- 
ferences in  race,  nationality,  and  political  ideals  which  play 
their  part  in  shaping  economic  conduct.  One  effect  of  the 
latter  has  already  been  noted,  that  is,  the  mireadiness  of  work- 
men to  give  up  home  and  country  for  the  sake  of  the  higher 
earnings  that  may  be  obtained  in  other  places.  In  consequence 
of  this  "  immobility  of  labour,"  dift'erences  in  wages  between 
different  countries  persist  generation  after  generation  and  play 
their  part  in  shaping  foreign  trade.  Differences  in  interest 
rates  traceable  to  the  immobility  of  capital,  although  less 
marked,  are  not  without  their  influence  also. 

The  guiding  principle  which  controls  foreign  trade  is 
summed  up  in  the  statement  that  each  country  produces  for 


Principle  Controlling^  Foreign  Trade     369 

export  those  things  whicli  it  can  produce  most  cheaply,  and  Principle 
imports  in  exchange  those  things  which  other  countries  can  Foreign '^^ 
produce  most  cheaply.    In  the  absence  of  trade  restrictions,  the  Trade 
capital  and  labour  force  of  each  countr\-  tends  to  be  assigned 
to  those  branches  of  production  for  which  it  has  the  greatest 
natural  or  acquired  aptitude.    The  selection  is  not  determined 
absolutely,  but  by  comparative  standards.    That  is,  one  country 
may  have  an  absolute  advantage  over  other  countries  for  the 
production  of  hundreds  of  different  commodities,  but  its  inter- 
est and  wage  rates  may  be  so  much  higher — in  consequence 
of  these  very  advantages — than   those  of  the   latter  that   it 
can  produce  more  cheaply  than  they  onl}-  the  score  or  more 
of  these   commodities   in   which  its   superiority   is   most   pro- 
nounced. 

Other  countries  also  must  find  employment  for  their  capital 
and  labour  and  by  submitting  to  lower  interest  and  wage  rates 
will  be  able  to  produce  some  commodities  more  cheaply,  even 
though  with  greater  expenditure  of  time  and  eft'ort,  than  the 
superior  country.  An  illustration  of  the  way  in  which  a  country 
may  produce  for  export  commodities  which  it  cannot  produce 
as  easily  as  the  importing  country  is  afforded  by  the  trade 
between  the  United  States  and  Germany.  The  former  imports 
from  the  latter  cutlery,  beet  sugar,  and  several  other  commodi- 
ties which  it  could  produce  with  less  effort  than  their  production 
in  Germany  costs.  Such  trade  is,  nevertheless,  mutually  advan- 
tageous, because  on  the  side  of  Germany  it  permits  a  utilisa- 
tion of  capital  and  labour  which  yields  larger  returns  in  wheat, 
salt  meat,  and  the  other  goods  that  are  imported  from  the 
United  States  than  could  be  secured  by  the  direct  production 
of  these  things,  while  on  the  side  of  the  United  States  it  enables 
the  country  to  secure  the  commodities  imported  in  exchange 
for  wheat,  salt  meat,  etc.,  with  less  expenditure  of  eft'ort  than 
would  be  involved  in  their  production.  The  situation  of  a 
country  is  not  unlike  that  of  an  individual.  It  has  a  limited 
force  of  labour  and  capital  to  employ  and  secures  the  largest 
return  by  concentrating  these  where  they  are  most  eft'ective. 
Just  as  it  does  not  pay  a  successful  lawyer  to  do  his  own 
typewriting,  no  matter  how  expert  a  typewriter  he  may  be.  so 
it  does  not  pay  a  country  to  do  many  things  it  could  do  more 


The 

Policy  of 
Protection 


The  Ad- 
vantages 
of  Free 
Trade 


370        Foreign  Exchange  and  the  Tariff 

easily  than  its  neighbours,  because  there  are  other  things  it 
can  do  still  more  easily  and  that,  therefore,  pay  better. 

§  211.  As  already  stated,  most  countries  subject  their  foreign 
trade  to  restrictions  from  which  their  domestic  trade  is  exempt. 
This  policy  is  called  "  protection,"  as  its  principal  purpose  is 
to  protect  home  producers  from  foreign  competition  in  the 
home  market.  How  this  may  be  accomplished  by  prohibiting 
or  taxing  the  importation  of  commodities  that  may  be  produced 
at  home  is  obvious.  As  a  preparation  for  discussing  the  argu- 
ments in  favour  of  such  restrictions  we  may  profitably  recall 
the  advantages  that  are  claimed  for  free  trade. 

As  pointed  out  in  the  preceding  section,  the  chief  purpose  of 
foreign,  as  of  domestic,  trade  is  to  render  possible  the  division 
of  labour  and  the  economies  connected  with  it.  That  this  pur- 
pose will  be  most  fully  realised  in  connection  with  domestic 


trade,  if   free  exchange  is  permitted,  is 


generally 


conceded. 


Under  such  circumstances  each  individual  will  tend  to  devote 
his  labour  and  capital  to  that  pursuit  for  which  he  is  best  fitted 
and  will  obtain  from  other  specialists,  through  exchange,  the 
varied  products  he  requires.  Obstacles  to  free  exchange  pre- 
vent the  full  realisation  of  this  division  of  labour  by  limiting 
the  market  for  the  products  of  specialists  and  thus  compelling 
them  to  produce  for  themselves,  or  go  without,  some  of  the 
things  they  might  otherwise  obtain  by  exchange.  But  the  same 
reasons  that  make  free  exchange  within  a  country  advantageous 
may  be  urged  in  favour  of  free  trade  between  countries.  Polit- 
ical boundaries  do  not  alter  the  essential  facts  that  trade  is  at 
bottom  an  exchange  of  goods  for  goods  in  wiiich  both  parties 
are  gainers,  and  that  the  freer  the  conditions  of  exchange  the 
more  highly  will  the  division  of  labour  be  developed.  Differ- 
ences in  the  productive  capacities  of  different  countries  fit  some 
to  produce  some  things,  others  others.  If  free  trade  is  per- 
mitted, each  will  tend  to  produce  only  those  things  for  which 
it  is  best  adapted  and  to  rely  upon  other  countries  for  the  other 
things  desired  and  in  the  production  of  which  the  latter  have 
a  relative  advantage.  The  consequence  will  be  a  larger  joint 
produce  and  a  larger  share  of  wealth  for  each  country  than  it 
could  secure  if  compelled  to  produce  for  itself  all  of  the  things 
that  its  inhabitants  require.     If  restrictions  on  trade  are  to  be 


The  Home-Market  Argument  371 

approved,  it  must  be  because  they  accomplish  results  tliat  com- 
pensate a  country  for  the  undoubted  losses  which  they  entail. 

§  212.  Some  of  the  strongest  arguments  in  favour  of  protec-  History  of 
tion  apply  to  countries  only  at  particular  stages  of  their  indus-  l^ro^^ction 
trial  development.  For  this  reason  and  because  it  has  been  the  United 
policy  of  the  country  almost  since  the  beginning  of  its  history,  ^'^^^^s 
it  will  be  profitable  to  discuss  the  subject  of  protection  as  it  has 
gradually  unfolded  with  the  growth  of  the  United  States.  In 
Chapter  II.,  Section  13,  attention  was  called  to  the  connection 
between  the  ideal  of  national  economic  independence  and  the 
protective  features  in  the  first  United  States  tariff  (1789). 
During  the  period  of  trade  restriction  which  preceded  and  ac- 
compained  the  war  of  1812,  this  ideal  was  so  far  realised  that 
other  arguments  for  protection  began  to  be  advanced.  The 
Tariff  Act  of  1816,  the  first  highly  protective  tariff  that  the 
country  had  known,  was  defended  more  on  the  ground  of  pro- 
tecting industries  already  established  than  of  building  up  new 
industries.  In  fact,  the  highest  duties  provided  were  to  remain 
in  force  only  three  years,  as  it  was  believed  that  by  that  time 
American  manufacturers  would  be  adjusted  to  the  conditions 
of  peace  and  able  to  hold  their  own  against  foreign  competi- 
tors. The  erroneousness  of  this  view  was  soon  demonstrated 
and  succeeding  tariffs  continued  the  protective  policy,  although 
with  modifications,  down  to  1857.  During  this  period  the 
"  vested-interests  argument,"  the  "  home-market  argument," 
and  the  "  infant-industry  argument "  were  those  most  fre- 
quently urged  in  support  of  protection.* 

The  vested-interests  plea  needs  no  explanation.  It  is  always 
urged  by  conservative  people  in  favour  of  the  continuance  of 
an  established  policy,  but  does  not  pretend  to  throw  any  light 
upon  the  merits  of  a  policy  in  itself. 

The  home-market  argument,  as  advanced  by  Henry  Clay,  The  Horns 
the  "  father  of  the  American  System,"  as  protection  began  to  be  Argument 
called,  was  designed  to  reconcile  the  interests  of  the  agricul- 
tural South  and  West  with  those  of  the  manufacturing  North. 
It  rested  upon  the  proposition  that  the  prosperity  of  the  Ameri- 

♦The  material  for  this  section  and  that  which  follows  has  been 
drawn  largely  from  the  author's  article  on  Protection,  in  the  New 
International  Encyclopedia. 


372        Foreign  Exchange  and  the  Tariff 

can  farmer  depends  upon  a  regular  and  constant  market  for  his 
products,  and  that  such  a  market  is  to  be  obtained  only  by 
building  up  manufacturing  centres  within  the  country.     The 
experience  of  the  years  from  1816  to  1825  was  cited  to  prove 
that  the  foreign  market  is  not  to  be  depended  upon  and  farmers 
were  exhorted  to  unite  with  manufacturers  to  establish  a  sys- 
tem which  should  bind  different  sections  of  the  country  together 
by   furthering  the   interests   of  all.     To  the  greater  stability 
claimed  for  the  home  market — a  quality  now  seriously  ques- 
tioned by  economists — later  analysis  has  added  another  merit. 
The  home  market  calls  not  only  for  the  staple  products  which 
will  bear  ocean  transportation,  but  also  for  all  kinds  of  perish- 
able goods.     Substituting  it  for  the   foreign  market   renders 
possible  diversified  farming  and  enables  cultivators  to  substi- 
tute for  exhausting,  one-crop  systems  of  agriculture,  rotations 
of  crops  which  serve  to  preserve  and  perpetuate  the  fertile 
properties  of  the  soil.     This  advantage  is  believed  by  protec- 
tionists to  outweigh  the  admitted  losses  incidental  to  the  pro- 
tective policy  and  to  insure  in  the  long  run  a  greater  degree 
of  prosperity  than  will  result  from  the  free  play  of  economic 
forces. 
The  Infant-       The  infant-industry  argument  is  the  one  to  which  economists 
Argument     usually  concede  greatest  weight.     It  is  urged  in  both  a  special 
and  a  general  form.     As  it  applies  to  special  industries  it  rests 
on  a  recognition  of  the  risks  and  difficulties  which  attend  the 
domestication  of  new  branches  of  production.     In  the  success- 
ful prosecution  of  any  industry  three  factors  co-operate :    the 
requisite  natural  resources,  skilled  and  unskilled  workmen  of 
different  grades,  and  the  appropriate  forms  of  capital.     As  re- 
gards each  one  of  these,  the  country  which  has  practised  an  in- 
dustry has  a  marked  advantage  over  the  country  which  has  not. 
The  natural  resources  of  the  latter  may  be  superior,  but  they 
are  undeveloped ;  its  labour  force  may  be  ample  and  adaptable, 
but  it  is  untrained ;  its  people  may  be  competent  to  use  tools  and 
machines,  but  they  have  no  familiarity  with  the  special  forms 
of  capital  needed.     Under  such  circumstances  the  encourage- 
ment of  a  protective  tariff'  may  suffice  to  induce  investors  to 
establish  the  new  industry  when  without  it  they  would  not 
venture  on  such  a  step.     After  a  few  years,  if  the  industry  to 


Argument  of  List  373 

be  domesticated  has  been  wisely  chosen,  the  initial  difficulties 
will  have  been  surmounted  and  the  protective  duty  may  be  with- 
drawn without  detriment  to  the  now  vigorous  infant.  Advo- 
cates of  such  a  policy  recognise  quite  clearly  that  resort  to  pro- 
tection entails  a  burden  on  consumers.  They  justify  the 
temporary  loss  on  the  ground  that  the  establishment  of  the 
new  industry  on  a  permanent  footing  will  afford  in  the  end  a 
more  than  compensating  gain. 

The  infant-industry  argument  in  its  general  form  recognises  Argument 
that  countries  must  usually  pass  through  different  stages  of  °  '^ 
industrial  development  and  advocates  protection  as  a  means  of 
accelerating  progress  during  periods  of  transition  from  one 
stage  to  another.  The  best  statement  of  this  argument  is  that 
given  by  Friedrich  List  in  his  Das  nationale  System  der 
politischcn  Ockononde,  which  appeared  in  1841.  The  conclu- 
sions at  wiiich  List  arrived  were  based  on  the  contrast  between 
an  industrial  country  like  England  and  an  agricultural  coun- 
try, such  as  Germany  was  at  the  time  he  wrote.  In  his  opinion 
England's  success  as  a  manufacturing  country  was  due  chiefly 
to  the  development  of  certain  industrial  qualities  among  her 
people.  Gennany,  he  thought,  might  develop  the  same  quali- 
ties among  Germans  by  means  of  a  protective  policy  which 
would  force  them  to  manufacture  for  themselves.  Through 
protection  the  natural  resources  of  the  country  necessary  to  the 
development  of  manufacturing  would  also  be  opened  to  exploi- 
tation. From  this  point  of  view  protection  is  a  temporary 
means  by  which  an  agricultural  country  may  transform  itself 
into  an  industrial  country.  After  the  transformation  is  com- 
pleted the  new  manufacturing  industries,  or  at  least  a  great 
many  of  them,  will  be  quite  capable  of  holding  their  own  in 
competition  with  the  manufacturing  industries  of  other  coun- 
tries and  protection  will  no  longer  be  required. 

§213.  The  last  stage  in  the  development  of  the  protective  Protectioa 

policy  of  the  United  States  has  been  the  outgrowth  of  the  Civil  't  ^^l^ a 
^        ■'  ^  United 

War,     That  struggle  involved  the  withdrawal  from  Congress  States 
of  the  representatives  of  the  Southern  States  who  had  been  the  cTv'itwar 
most  active  opponents  of  protection.     L'nder  the  guidance  of 
representatives  from  the  North  successive  tariffs  were  passed 
carrying  the  policy  to  the  most  extreme  lengths  which  the 


374       Foreign  Exchange  and  the  Tariff 

country  had  known.  Factors  in  this  development  were  the 
anti-foreign  sentiment  which  resulted  from  the  somewhat  hos- 
tile attitude  of  Europe  to  the  cause  of  the  North,  and  the  com- 
prehensive system  of  internal  revenue  taxation  adopted 
during  the  \\'ar,  which  had  to  be  offset  by  higher  import  duties 
if  Americans  were  not  to  be  placed  at  a  disadvantage  in  com- 
petition with  foreign  producers.  The  change  in  the  level  of 
duties  which  resulted  from  this  combination  of  circumstances 
is  indicated  by  the  fact  that  whereas  under  the  Act  of  1857  the 
highest  duties  imposed  were  24  per  cent,  ad  valorem,^  under 
the  Act  of  1S64  the  average  rate  of  duty  on  dutiable  articles 
was  over  47  per  cent.  During  the  first  fifteen  years  after  the 
close  of  the  war  the  attention  of  Congress  was  occupied  by 
questions  of  reconstruction,  the  resumption  of  specie  payments, 
etc.,  and  no  change  of  importance  was  made  in  the  tariff  except 
that  it  became  increasingly  protective  as  the  internal  revenue 
duties  were  one  by  one  removed.  \\'hen  attention  was  again 
concentrated  upon  the  tariff  question  the  protectionists  were 
still  in  control  of  Congress.  The  tariffs  of  1883  and  1890  were 
both  modifications  in  the  direction  of  higher  duties.  The  Act 
of  1894  was  a  reactionary  measure,  but  was  so  garbled  in  its 
passage  through  Congress  that  the  tariff-reform  President  of 
the  period.  ]Mr.  Cleveland,  allowed  it  to  become  a  law  without 
his  signature.  The  victory  of  the  Republicans  in  1896,  although 
little  related  to  the  tariff  issue,  involved  as  an  incident  a  return 
to  a  highly  protective  policy.  In  fact  the  Dingley  Act  of  1897 
marks  the  extreme  limit  to  which  that  policy  has  been  carried 
in  the  United  States. 

The  "V\  ages       During  this  last  period  at  least  one  new  argument  of  im- 
Argnment  ^  ...  .  •  ,        < 

portance  was  advanced  m  support  of  protection,  the  '  wages 

argument.''    Before  protection  became  the  settled  policy  of  the 

countrv,  one  of  the  reasons  urged  in  its  favour  was  that,  since 

wages  were  higher  in  the  United  States  than  abroad,  some 

special  encouragement  was  necessary-  to  the  introduction  of  new 

industries  to  enable  employers  to  compete  with  the  low-wage 

labour  of  Europe.  After  protection  became  a  settled  fact,  by  an 

*  Ad  valorem  duties,  or  duties  cased  on  value,  are  to  be  contrasted 
•with  specific  duties  based  on  quantity  {e.  g.,  so  much  a  pound  or  a 
bushel). 


Political  Ideal  of  Protectionists  375 

interesting  inversion,  //  began  to  be  given  credit  for  the  high 
wages  of  American  labour.  The  wages  argument  runs  as  fol- 
lows :  In  protected  industries  higher  wages  are  paid  in  the 
United  States  than  in  similar  industries  abroad.  Protection, 
therefore,  causes  high  wages,  and  its  withdrawal  must  tend  to 
pauperise  American  labour.  This  overlooks  certain  important 
considerations.  First,  equally  high  wages  are  paid  in  unpro- 
tected as  in  protected  industries,  and  the  former,  which  in  the 
United  States  include  farming,  mining,  transportation,  and 
many  branches  of  manufacturing,  vastly  exceed  the  latter 
in  importance  and  magnitude.  Second,  employers,  whether 
protected  or  unprotected,  desire  to  secure  their  labour 
as  cheaply  as  they  can  and  there  is  nothing  in  a  pro- 
tective tariff  which  forces  them  to  pay  higher  wages  than 
are  current  in  the  community  in  which  the  protected 
industries  are  located.  In  other  words,  employers  in  pro- 
tected industries  pay  the  wages  they  must  to  get  the  labour 
they  require,  and  these  depend  not  upon  the  protective  tariff, 
but  upon  general  industrial  conditions.  Third,  it  is  not  true 
that  high  wages  and  protection  always  go  together.  For 
example,  wages  in  protectionist  Germany  are  lower  than  in 
free-trade  England.  For  these  reasons  the  wages  argument, 
although  effective  for  campaign  purposes,  has  never  enjoyed 
much  repute  among  trained  economists. 

Even    more    influential    than    the    economic    arguments    in  Political 
favour  of  protection  that  have  been  reviewed,  has  been  the  prote°- 
ambition  of  American  statesmen  to  cement  the  bonds  which  tionists 
unite  dift'erent  sections  of  the  country  by  means  of  a  tariff 
which  should  make  them  mutually  dependent  and  at  the  same 
time  independent  of  Europe.     This  was  to  be  accomplished 
by  developing  the  division  of  labour  to  the  highest  point  within 
the  country,  without  giving  any  encouragement  to  the  inter- 
national  division  of  labour  upon  which   foreign  trade  rests. 
Horace    Greeley,    the    influential    editor    of    the    New    York 
TribiDic,  expressed  this  view  of  protection  with  his  usual  clear- 
ness in  the  following  declaration :  *  "  If  I  had  my  way  I  would 
put  a  duty  of  ?ioo  a  ton  on  pig  iron,  and  a  proportionate  duty 

*  Interview  of  Horace  Greeley  with  President  Garfield (i8Si),  quoted 
from  Dewey's  Financial  History  of  the  United  States,  p.  397. 


of  1897 


376       Foreign  Exchange  and  the  Tariff 

on  everything  else  that  can  be  produced  in  America,  The  re- 
sult would  be  that  our  people  would  be  obliged  to  supply  their 
own  wants,  manufactures  would  spring  up,  competition  would 
finally  reduce  prices  and  we  would  live  wholly  within  our- 
selves." From  this  point  of  view  the  chief  function  of  pro- 
tection is  to  serve  as  a  Chinese  wall  to  preserve  the  United 
States  from  the  contamination  of  foreign  influences.  Un- 
economic as  such  an  ideal  must  appear,  it  cannot  be  doubted 
that  it  makes  a  strong  appeal  to  many  patriotic  citizens.  But 
for  it  tariff  controversies  in  the  United  States  would  have  had 
little  of  the  moral  earnestness  which  has  characterised  them 
whenever  protection  has  been  the  issue. 
Tbe^Tariff  §  214.  A  brief  description  of  the  tarifif  of  1897,  still  (July  i, 
1903)  in  force  in  the  United  States,  will  serve  to  emphasise 
one  argument  against  protection — that  is,  its  complexity.  The 
act  in  which  this  tarifif  is  embodied  covers  seventy  octavo  pages 
and  enumerates  upvk'ards  of  3500  different  articles  of  which 
some  350  are  admitted  into  the  country  free  of  duty  and  the  re- 
mainder are  subject  to  taxation.  There  are  fourteen  different 
schedules  (lettered  "A"  to  "  N  ")  under  which  dutiable 
articles  are  classified.  Schedule  "  K,"  embracing  "  wool  and 
manufactures  of  wool,"  is  fairly  typical.  In  it  wool  is  di- 
vided into  three  elaborately  distinguished  classes  to  each  of 
which  a  special  duty  is  applied.  Wools  of  classes  one  and  two 
are  taxed  eleven  and  twelve  cents  a  pound  respectively.  Wool 
of  class  three,  worth  less  than  twelve  cents  a  pound,  is  taxed 
four  cents  and,  worth  more,  seven  cents  a  pound.  The  rate  of 
taxation  on  the  cheaper  grades  is  thus  from  33  Yz  per  cent,  to 
58  per  cent.  These  duties  are  intended,  of  course,  to  protect 
farmers  and  ranchers  engaged  in  the  production  of  wool.  To 
protect  manufacturers  of  woollen  goods  it  is  necessary  to  com- 
pensate them  for  the  higher  prices  they  have  to  pay  for 
protected  wool  as  well  as  to  protect  them  against  foreign  man- 
ufacturers. The  tariff  accomplishes  this  object  by  subject- 
ing woollen  goods  to  both  a  specific  and  an  ad  valorem 
duty.  For  example  woollen  yarn,  if  made  of  wool  worth 
less  than  thirty  cents  a  pound,  pays  a  specific  duty  on  each 
pound  equal  to  two  and  one-half  times,  and,  if  of  wool 
worth  more,  to  three  and  one-half  times,  the  per  pound  duty 


The  Burden  of  Protection  377 

on  wool  of  tlie  first  class,  and  in  addition  an  ad  valorem 
duty  equal  to  40  per  cent.  Similar  mixed  duties  apply  to 
woollen  cloths  of  all  kinds,  with  the  consequence  that  the 
tax  on  consumers  of  imported  woollen  goods  is  very  heavy. 
According  to  the  returns  of  the  customs  office  for  the  year 
ending  June  30,  1902,  the  average  rate  of  duty  on  wool  im- 
ported during  that  year  was  59  per  cent,  and  the  average  rate 
on  the  manufactures  of  wool  92  per  cent.  The  rates  on  other 
textiles,  the  raw  materials  of  which  do  not  require  protection, 
are  of  course  less  extreme,  but  the  returns  indicate  that  the 
average  rate  on  imported  cotton  goods  during  the  same  year 
was  55  per  cent.,  and  on  imported  silk  goods  54  per  cent. 

The  above  duties  on  textile  goods  are  among  the  highest  The 
protective  duties  on  the  list,  being  exceeded  only  by  the  duties  protection 
on  china  and  glass  ware,  which  averaged  59  per  cent.  The 
general  average  on  all  dutiable  articles  was,  however,  nearly 
50  per  cent,  in  the  year  referred  to,  so  that  the  duties  cited  give 
no  exaggerated  picture  of  the  burden  of  taxation  which  re- 
sults from  the  protective  system.  Nor  is  this  burden  ade- 
quately represented  by  the  statement  that  consumers  of  im- 
ported commodities  which  compete  with  American  products 
must  pay  on  the  average  50  per  cent,  more  than  such  products 
are  worth  abroad.  Much  heavier  is  the  burden  which  results 
from  the  exclusion  of  foreign  products  and  the  enhancement 
of  the  prices  of  American  goods.  The  higher  prices  that  con- 
sumers must  pay  for  protected  goods  in  order  that  they  may 
be  produced  at  home  afford  no  revenue  to  the  Government,  al- 
though they  add  so  largely  to  the  expense  of  living  in  the 
United  States. 

Space  will  not  permit  a  description  of  other  features  of  the  Complexity 
tariflF.     The  complexity  of  the  wool  schedule  is  matched  in  the  ^^|.j^|| 
schedules  applying  to  the  metals,  to  wood  and  manufactures  of  Question 
wood,  to  silk  goods,  etc.     To  fully  master  any  one  of  these 
schedules  and  determine  what  rates  of  duty  would  afford  ade- 
quate protection  without  unduly  burdening  consumers  would 
require  months  of  study  of  the  industries  affected,  both  at 
home  and  abroad.     To  fully  master  all  of  them,  with  the  three 
thousand  odd  different  articles  to  which  they  refer,  is  a  task 
beyond  human  capacity.    Needless  to  say.  Congress  in  drafting 


378 


Foreign  Exchange  and  the  Tariff 


Present 
Status  of 
the  Tariff 
Question 
in  the 
United 
States 


tariff  bills  makes  no  such  ambitious  attempt.  Instead,  it  con- 
tents itself  with  taking  the  testimony  of  interested  persons  as 
to  the  amount  of  protection  their  businesses  require,  and  accepts 
their  statements  as  its  guide  in  apportioning  protection  to  dif- 
ferent industries.  The  bill  so  prepared  by  the  Committee  of 
Ways  and  Means  in  the  House  of  Representatives  is  submitted 
to  a  running  fire  of  criticism  and  amendment  in  both  Houses, 
and  when  finally  passed  is  such  a  hodge-podge  of  compromises 
that  even  the  most  earnest  advocates  of  protection  are  usually 
forced  to  express  regret  that  a  better  measure  could  not  be 
secured.  The  complexity  of  a  protective  tariff,  with  its  thou- 
sands of  items  and  its  confusing  medley  of  ad  valorem  and 
specific  duties,  applying  often  to  the  same  commodities,  is  in 
striking  contrast  with  a  tariff  for  revenue  only  like  that  of  the 
United  Kingdom.  The  latter  contains  but  a  few  items,  and 
since  it  serves  no  special  interest,  except  that  of  the  Govern- 
ment, may  be  drawn  up  in  a  simple  and  business-like  way. 
Its  financial  results  can  be  foretold  with  a  high  degree  of  pre- 
cision, and  its  capacity  to  yield  revenue  is  even  greater  than 
that  of  the  more  burdensome  protective  tariff  because  it  con- 
fines itself  to  articles  that  are  widely  consumed. 

§  215.  Arguments  in  favour  of  protection  ought  to  be  care- 
fully weighed  against  the  general  argument  in  favour  of  free 
trade,  not  as  abstract  propositions,  but  with  reference  to  the 
concrete  circumstances  of  each  particular  country.  The  result 
of  such  a  procedure  applied  to  the  present  industrial  situation 
of  the  United  States  is,  in  the  opinion  of  the  author,  decidedly 
unfavourable  to  the  claims  of  protectionists.  National  economic 
independence,  the  first  and  perhaps  the  strongest  reason  urged 
in  support  of  protection,  has  long  since  been  achieved  and 
would  not  be  endangered  in  the  slightest  degree  by  a  change  of 
trade  policy.  The  vested-interests  argument  is  of  weight  as  a 
plea  against  a  too  hasty  reduction  of  duties  upon  which  impor- 
tant industries  have  come  to  depend,  but  cannot  justify  the  in- 
definite continuance  of  such  duties  if  they  no  longer  serve  the 
best  interests  of  the  whole  country.  The  home-market  argu- 
ment has  little  application  to  the  present  situation,  when  such  a 
large  proportion  of  the  staple  products  of  the  country  seek  the 
foreign  consumer  in  defiance  of  the  tariff  and  when  the  conse- 


The  Strength  of  Protection  379 

quence  of  the  latter  is  too  often  tariff  retaliation  on  the  part  of 
other  countries  much  more  unsettling  in  its  effects  than  fluc- 
tuations in  foreign  demand,  independent  of  hostile  tariffs, 
could  possibly  be.  The  infant-industry  argument  in  its 
special  form  is  now  applicable  to  but  few  American  industries, 
while  in  its  general  form  it  has  certainly  been  outgrown  by  a 
country  whose  manufactured  products  already  compete  success- 
fully for  a  share  of  the  foreign  market.  Finally,  the  wages 
argument  inverts  the  true  relation  between  protection  and 
high  wages.  High  wages  are  due,  as  explained  in  a  previous 
chapter,  to  the  high  productiveness  of  labour,  due,  in  turn,  to 
the  superior  natural  resources  of  a  country,  its  abundant  and 
efficient  equipment  of  capital  goods,  and  the  capacity  of  its 
entrepreneurs  and  wage-earners.  It  is  because  of  high  wages 
that  protection  is  necessary  to  the  maintenance  of  certain  indus- 
tries in  the  United  States.  Without  it  goods  now  produced 
in  the  country  would  be  imported  and  paid  for  by  increased 
production  in  those  lines  of  industry  which  need  no  protection. 
Since  labour  and  capital  are  more  productive  in  unprotected 
than  in  protected  industries,  the  withdrawal  of  protection 
and  the  concentration  of  labour  and  capital  in  the  former 
might  be  expected,  time  being  allowed  for  the  necessary 
readjustment,  not  to  lower  wages,  but  to  raise  them.  Cer- 
tainly more  wealth  would  be  produced  under  the  new  arrange- 
ment, and  labour's  chance  of  getting  a  larger  share  would 
seem  as  good  as  that  of  any  other  factor  in  production. 
Thus  instead  of  raising  wages,  protection  serves  on  the  whole 
to  lower  them  and  is  itself  necessary  because  wages  were  al- 
ready high  before  it  was  introduced.  The  case  for  protection 
thus  appears  on  every  count  to  be  decidedly  weak  in  compari- 
son with  the  case  for  free  trade.  If  the  issue  were  to  be 
decided  solely  on  grounds  of  economic  reasoning,  it  is  believed 
that  the  policy  of  protection  would  be  quickly  abandoned. 

The  present  strength  of  protection  in  the  United  States  rests,  The 
however,  less  on  reasoning  than  on  sentiment  and  experience.  Pro^tection^ 
The  all-important  fact  that  cannot  be  argued  out  of  the  mind 
of  the  practical  business  man  is  that  protection  has  been  the 
policy  of  the  country  during  a  period  of  remarkable  industrial 
prosperity.    That  this  has  been  an  accident  he  will  not  believe. 


Opposition 
to  Protec- 
tion to 
T>rusts 


Folly  of 
Protecting 
Exploita- 
tion of 
Limited 
Natural 
Resources 


380       Foreign  Exchange  and  the  Tariff 

or  at  any  rate  he  prefers  to  "  let  well  enough  alone,"  and  to 
refrain  from  disturbing  a  system  which  may  have  had  some- 
thing to  do  with  the  country's  undoubted  progress.  Under 
these  circumstances  the  policy  of  protection  is  likely  to  be 
adhered  to  as  long  as  prosperity  continues,  or  until  those  whose 
interests  would  be  directly  furthered  by  free  trade  organise 
as  effectively  to  oppose  protection  as  interested  manufacturers 
are  already  organised  to  maintain  it. 

§  216.  According  to  the  general  argument  for  free  trade,  it 
is  the  consuming  public,  which  has  to  pay  higher  prices  for 
protected  goods,  that  is  most  injured  by  protection.  But  the 
consuming  public  constitutes  no  definite  class  and  its  organi- 
sation as  a  party  of  opposition  is  highly  improbable.  At  certain 
points,  however,  the  protective  tariff  of  the  United  States  is 
already  subject  to  vigorous  attack  by  particular  consumers. 
One  of  these  is  where  it  acts  as  a  shield  for  the  combinations 
of  manufacturers  or  trusts  discussed  in  Chapter  XXV.  Indi- 
cations are  not  lacking  that  the  first  breaches  in  the  American 
tariff  wall  will  be  through  lowered  duties  on  trust-made  goods. 

Another  aspect  of  protection  that  is  beginning  to  receive 
merited  condemnation  is  its  tendency  to  hasten  the  destruction 
of  limited  natural  resources.  In  the  United  States  important 
branches  of  mining,  such  as  coal  and  iron,  are  protected,  in 
utter  disregard  of  the  fact  that  this  forces  the  country  to  use 
up  its  own  limited  supplies  of  these  indispensable  materials 
when  it  might,  in  the  absence  of  the  tariff,  secure  at  least  a  part 
of  what  it  needs  from  neighbouring  countries.  Protection  is 
also  extended  to  the  lumber  industry,  although  it  is  notorious 
that  the  destruction  of  American  forests  is  progressing  at  a  rate 
that  threatens  grave  injury  even  to  the  present  generation.  It 
seems  too  clear  for  argument  that  wise  national  policy  demands 
the  conservation  rather  than  the  destruction  of  limited  natural 
resources  such  as  those  mentioned.  When  a  revision  of  the 
present  tariff  is  undertaken,  this  aspect  of  the  subject  is  sure 
to  be  impressed  upon  Congress,  and  there  is  reason  to  hope  that 
these  most  objectionable  protective  duties  may  be  repealed. 

Somewhat  less  direct  than  the  burden  protection  imposes  on 
consumers  is  the  injury  which  it  does  to  producers  for  the  for- 
eign market.    They  suffer  in  both  a  general  and  a  special  way. 


The  Future  381 

In  gfeneral,  protection,  bv  curtailing  imports,  curtails  the  for-  The 

•         ,  ,  r  •  1      .  .        Ti  •  ^  1      u       Burden  of 

eign  demand  for  native  products,  or  exports,     inis  must  be  tne  protection 

case,  for  in  the  long  run  imports  and  exports  pay  for  each  to  Pro- 
other.  A  country  which  will  not  take  the  products  of  Export 
other  countries  cannot  sell  to  them.  For  a  short  time  they 
may  pay  in  specie  for  what  they  cannot  pay  for  in  goods, 
but  as  pointed  out  in  Section  209,  the  exportation  of  gold 
must  soon  be  checked  automatically  by  changes  in  interest 
rates  and  price  levels.  Thus  the  policy  of  excluding  foreign 
goods  from  the  home  market  in  order  that  home  industries 
may  develop  to  satisfy  its  needs,  is,  from  the  point  of  view 
of  producers  for  export,  a  policy  of  repression  rather  than 
of  protection.  To  the  same  extent  that  the  home  market 
is  wrested  from  foreigners  and  given  to  protected  home 
producers,  the  foreign  market  is  wrested  from  unprotected 
home  producers.  The  latter  have  good  reason  for  complaining 
that  discrimination  in  favour  of  industries  which  need  protec- 
tion is  discrimination  against  them.  Until  recently,  the  indus- 
tries in  the  United  States  which  produced  for  export  have  been 
the  great  extractive  industries.  Now  that  manufacturers  also 
are  beginning  to  look  to  the  foreign  market  for  their  customers, 
this  adverse  side  of  protection,  to  which  they  seem  to  have 
been  blind  in  the  past,  is  likely  to  receive  its  proper  share  of 
consideration. 

The  special  grievance  which  producers  for  export  urge  Retaliatory 
against  protection  is  that  it  antagonises  foreign  governments  ^^  ^ 
and  leads  to  retaliatory  measures.  Protection  is  a  game  at 
which  two  can  play  and  which  loses  much  of  its  interest  when 
participated  in  too  widely.  The  United  States  has  already  been 
the  object  of  tariff  retaliation  on  the  part  of  Germany  and 
Russia,  and  if  the  temper  evinced  by  the  foreign  press  is  any 
criterion,  its  troubles  from  this  source  are  only  just  beginning. 

The  future  of  protection  in  the  United  States  is  uncertain,  as  The  Future 
must  be  the  future  of  any  political  policy,  but  there  seems  rea- 
son to  believe  that  the  trend  of  events  is  away  from,  rather  than 
towards  trade  restrictions.  Protection,  as  the  term  implies,  is  a 
policy  for  the  w'eak  rather  than  for  the  strong.  As  the  United 
States  becomes  conscious  of  its  industrial  strength  it  is  likely 
to  tear  down  its  protective  barriers  and  enter  the  field  of  free 


382        Foreign  Exchange  and  the  Tariff 

international  competition  in  the  same  confident  spirit  as  did  the 
United  Kingdom  half  a  century  ago. 
Free  Trade  §217.  Notwithstanding  the  strength  of  the  arguments 
against  protection  stated  in  the  preceding  sections,  it  has  been 
and  still  is,  with  few  exceptions,  the  policy  of  nations.  Among 
the  exceptions  the  most  notable  is  the  United  Kingdom,  and 
this  makes  a  brief  account  of  the  trade  policy  of  that  country 
of  particular  interest.  As  used  in  current  discussions,  "  free 
trade"  means,  not  perfectly  free  exchange  between  nations,  but 
exchange  restricted  only  by  moderate  revenue  duties.  It  was 
such  free  trade  that  the  British  Parliament  decided  to  introduce 
in  1846  and  that  was  fully  realised  in  the  tariff  adopted  in  i860. 
The  Pres-  The  present  trade  policy  of  the  United  Kingdom  may  be 

Policy  of  summed  up  in  the  following  propositions  :  ( i )  No  restrictions 
the  United  whatever  are  imposed  upon  exports,  except  a  temporary  war 
revenue  duty  of  one  shilling  a  ton  on  coal;  (2)  import  duties 
are  imposed  only  on  the  following  articles,  all  others  being  ad- 
mitted free,  viz.,  cocoa,  coffee,  chicory,  dried  fruit,  tea,  tobacco, 
wine,  beer,  spirits,  and  sugar;  (3)  to  prevent  these  duties  from 
offering  any  special  encouragement  to  home  as  distinguished 
from  foreign  producers,  the  production  in  the  United  Kingdom 
of  such  of  the  articles  as  might  be  there  produced  is  either  pro- 
hibited, as  in  the  case  of  tobacco,  or  subjected  to  exactly  equiva- 
lent internal  revenue  duties,  as  in  the  case  of  beer  and  spirits. 
The  policy  thus  opposes  no  obstacle  to  the  prosecution  within 
the  United  Kingdom  of  those  industries  for  which  the  country 
is  adapted,  while  it  affords  to  home  producers  no  advantages 
over  their  foreign  competitors  in  production  for  the  home  mar- 
ket except  those  which  nearness  to  that  market  and  better 
acquaintance  with  its  requirements  always  give. 
The  §  218.  For  a  time,  after  the  United  Kingdom  adopted  a  free- 

Movement  trade  policy,  it  seemed  as  though  other  European  states 
1860-1870  would  follow  her  example.  France  entered  into  a  series  of 
commercial  treaties,  beginning  with  the  Anglo-French  treaty 
of  i860,  which  made  her  trade  policy  exceedingly  liberal. 
Meantime  the  ZoUvercin,  or  tariff  union,  which  had  been 
organised  by  the  states  of  Northern  and  Central  Germany  from 
1831  to  1835,  was  moving,  under  the  leadership  of  Prussia,  in 
the  direction  of  a  tariff  for  revenue  onlv. 


The  Present  Outlook  Abroad  383 

The  national  animosities  which  grew  out  of  the  Franco-  The  Pro- 
Prussian  War  (1870-71)  checked  the  Uberal  movement,  and  KeaS?oa 
the  latest  changes  in  European  tariffs  have  been  decidedly  away 
from  free  trade.  The  reaction  in  Germany  was  signalised  by 
the  enactment  of  the  moderately  protective  tariff  of  1879.  The 
French  tariff  of  1881,  which  substituted  specific  for  ad  valorem 
duties,  was  also  moderately  protective  in  its  tendencies.  Subse- 
quent tariffs,  notably  that  of  France,  adopted  in  1892,  and  that 
of  Germany,  adopted  in  1902,  advanced  the  policy  of  protec- 
tion to  more  extreme  lengths  in  both  countries,  and  are  fairly 
typical  of  the  tariff  legislation  of  European  nations  generally 
during  recent  years.  Only  Belgium  and  Holland  have  held 
aloof  from  the  movement  towards  protection,  and  even  by  them 
free  trade  is  not  realised  to  the  same  extent  that  it  is  by  the 
United  Kingdom. 

The  war  of  protective  tariffs  which  is  now  in  progress  in  The  Pres- 
Europe  is  doing  more  than  could  any  amount  of  argument  to  ^l^road*^ 
discredit  that  policy.  Statesmen  in  all  countries  are  beginning 
to  appreciate  that  however  advantageous  protection  might  be 
if  one  country  could  practise  it  all  by  itself,  it  is  suicidal  when 
pursued  to  its  logical  limit,  that  is,  the  entire  exclusion  of  all 
products  that  may  be  produced  at  home,  by  all  countries  to- 
gether. The  United  States,  with  its  varied  natural  resources, 
may  pursue  such  a  policy  and  prosper,  but  this  is  not  possible 
for  one  of  the  countries  of  Europe.  It  may  take  time  for  this 
conviction  to  win  general  assent,  but  that  it  is  gaining  ground 
is  evinced  by  the  agitation  for  enlarging  the  boundaries  of  the 
protected  areas.  Tariff  unions  similar  to  the  German  Zoll- 
z'erein  are  now  being  considered  on  the  one  hand  for  the  whole 
continent  of  Europe,  and  on  the  other  for  the  whole  British 
empire.  That  such  unions  will  be  formed  is  highly  improb- 
able, but  that  the  same  arguments  that  are  urged  in  their 
favour  may  be  advanced  with  even  more  cogency  in  support  of 
a  policy  of  general  free  trade  must  be  admitted  by  all  who  have 
followed  the  tariff  controversy. 

REFERENCES  FOR   COLLATERAL    READING 

Scott,  Money  and  Banking,  Chap.  XII.;  Goschen,  The  Theory  of  the 
Foreign  E.xchanges  ;  *Clare,  The  A  B  C  of  the  Foreign  E.xchanges ; 


384        Foreign  Exchange  and  the  Tariff 

*  Pier  son.  Principles  of  Economics,  Part  II.,  Chap.  III.;  *Bastable, 
The  Theory  of  International  Trade  ;  Fawcett,  Free  Trade  and 
Protection  ;  Sumner,  Lectures  on  the  History  of  Protectionism  in 
the  United  States  ;  *Patten,  The  Economic  Basis  of  Protection ; 
Tho>npso7i,  Protection  of  Home  Industry  ;  *  Taussig,  Tariff  History 
of  the  United  States,  and  State  Papers  and  Speeches  on  the  Tariff  ; 
Stattwood,  American  Tariff  .Controversies  in  the  Nineteenth 
Century. 


CHAPTER  XXI 
THE    LABOUR    MOVEMENT 

§  219.  The  treatment  of  wages  in  the  chapter  on  that  topic  Obstacles 
was  open  to  the  charge  of  being  unduly  abstract.    The  assump-  (Competi- 
tion that  competition  has  free  play  between  workmen  and  em-  tion  in  the 
ployers  involves  a  disregard  of  palpable  facts  and  must,  for  i^iarket 
many  readers,  have  weakened  the  force  of  the  conclusion  that 
under   such  circumstances  workmen  of  the   same  grades  of 
capacity  tend  to  secure  the  same  rates  of  wages  in  each  labour 
market  and  that  in  general  these  rates  tend  to  be  the  shares  of 
the  joint  product  that  are  economically  imputable  to  labour  as 
distinguished  from  the  other  factors  in  production.    We  must 
now  give  full  weight  to  the  undoubted  fact  that  competition 
in  the  labour  markets  of  the  world  is  not  free  and  all-sided,  as 
assumed,  but  obstructed  in  various  ways,  and  consider  how  this 
modifies  our  conclusions  in  reference  to  the  relation  between 
work  and  pay.  •      ■' 

The  wages  contract  is  a  bargain,  and  when  it  fails  to  secure  The  Dis- 
for  labour  its  competitive  share  of  the  product  the  cause  must  of  Wa^e^'^^ 
be  sought  in  the  unequal  bargaining  ability  of  workmen  and  earners  as 
their  employers.     The  principal   disadvantages   under  which     ^^S^i^^^ 
workmen  are  placed  are:    First,  that  their  labour  resembles  a 
perishable  commodity  in  that  it  must  be  sold  each  day  if  they 
are  not  to  incur  loss.    This  circumstance  forces  them  at  times 
to  accept  wages  that  are  below  their  normal  earning  capacity, 
but  less  often  than  many  writers  represent.    The  typical  work- 
man, it  should  be  remembered,  is  not  the  unemployed  seeker 
after  a    job,  whose  unfortunate  plight  is  so  often  pictured,  but 
the  man  already  employed,  who  is  looking  for  a  somewhat 
better  position.    Unemployment  often  forces  workmen  to  make 
bad  bargains,  but  even  bad  bargains  may  suffice  to  enable  them 
to  make  better  terms  with  their  next  employers.     Only  when 
unemployment  continues  so  long  as  to  break  the  spirit  and 

3S5 


386 


The  Labour  Movement 


Competi- 
tion be- 
tween Em- 
ployers an 
Active 
Force 


Nature  of 
the  Labour 
Movement 


lessen  the  efficiency  of  a  workman  is  it  likely  to  cause  a  perma- 
nent lowering  of  his  earning  capacity.  A  second  disadvantage 
results  from  the  superior  knowledge  which  employers  usually 
have  of  the  conditions  that  influence  the  wages  contract.  More 
intelligent  as  a  rule,  and  able  from  their  position  to  take  a 
broader  survey  of  the  labour  market,  employers  can  often  per- 
suade workmen  to  accept  terms  much  worse  than  free,  all-sided 
competition  would  secure  for  them.  A  third  disadvantage 
results  from  the  actual  or  tacit  understandings  which  often 
restrain  employers  from  competing  freely  for  employees  by 
advancing  wages.  There  is  a  strong  reluctance  on  the  part  of 
employers  to  "  spoil  the  labour  market,"  and  even  when  they 
are  not  combined  in  employers'  associations,  as  often  happens, 
this  serves  to  make  them  conservative  in  reference  to  wasres. 

The  tendency  of  the  above  disadvantages  is  to  render  work- 
men inferior  to  employers  as  bargainers  and  to  cause  them  to 
accept  less  than  their  fair  share  of  the  products  they  help  to 
produce.  This,  it  must  be  clearly  understood,  is  only  a  tend- 
ency. Any  disparity  between  current  rates  of  wages  and  the 
value  of  the  prodtict  which  labour  is  able  to  produce  afifords  an 
inducement  to  employers  to  secure  more  hands.  Ordinarily  this 
motive  is  strong  enough  to  overcome  the  reluctance  which  em- 
ployers feel  to  bidding  up  wages,  and  ordinarily  competition 
between  them  is  sufficiently  active  to  maintain  wages  even  when 
the  ignorance  and  inertia  of  w^orkmen  might  lead  them  to  accept 
less  than  market  conditions  call  for.  Only  in  cases  in  which  the 
isolated  workman,  who  is  temporarily  out  of  employment,  bar- 
gains with  the  unscrupulous  employer  is  full  advantage  likely 
to  be  taken  of  the  former's  weakness.  As  a  protection  against 
this  situation  workmen  have  devised  and  perfected  labour  asso- 
ciations or  "  trade  unions,"  which  not  only  put  them  on  an 
equality  with  employers  in  making  wage  contracts,  but  even  in 
some  instances  turn  the  scales  in  their  favour  and  enable  them 
to  secure  wages  above  normal  competitive  rates. 

§  220.  The  labour  movement  is  the  term  applied  to  the  spon- 
taneous efforts  of  wage-earners  to  better  their  condition 
through  labour  organisations.  Starting  in  its  modern  form  in 
England  at  the  time  of  the  industrial  revolution,  it  has  spread 
to  every  country  which  has  introduced  the  factory  system  and 


Objects  of  Labour  Unions  387 

advanced  with  increasing  momentum  until  it  is  one  of  the  most 
significant  features  of  the  present  industrial  order. 

The  purpose  of  labour  organisations,  or  trade  unions,  is,  in  Objects  of 
general  terms,  to  advance  the  interests  of  the  workmen  who  unions 
form  them.  To  accomplish  this  they  choose  officers  (usually  a 
president,  vice-president,  secretary,  treasurer,  and  members  of 
a  standing  council  or  executive  committee),  accumulate  funds, 
administer  mutual  insurance  or  benefit  features,  bargain  with 
employers  in  reference  to  wages,  hours,  and  other  conditions 
of  employment,  organise  and  carry  through  strikes  and  boy- 
cotts, collect  and  disseminate  information  in  reference  to  labour 
conditions,  and  agitate  for  legislation  designed  to  promote  the 
interests  of  labour.  Starting  with  local  organisations,  the  labour 
movement  has  now  progressed  in  Great  Britain  and  the  United 
States  to  a  point  where  it  includes  unions  of  unions  of  various 
kinds  and  designed  to  serve  various  purposes.  In  all  well- 
organised  trades  the  local  branches  are  federated  or  "  amalga- 
mated "  into  national  organisations.  In  cities,  local  unions  are 
usually  organised  further  into  "  trade  councils,"  or  "  united 
labour  leagues,"  which  look  after  the  general  interests  of  organ- 
ised labour  within  the  locality.  Related  trades,  as,  for  example, 
the  building  trades,  are  frequently  federated  also  in  each  lo- 
cality into  organisations  like  the  United  Building  Trades, 
which  are  designed  to  assist  individual  unions  to  accomplish 
their  objects  when  these  are  not  deemed  at  variance  with  the 
interests  of  the  whole  body.  Finally,  in  the  United  States,  a 
large  proportion  of  the  organisations,  both  local  and  national, 
are  members  of  the  American  Federation  of  Labour,*  which 
stands  for  the  general  interests  of  organised  labour. 

Exact  statistics  of  the  membership  of  American  labour  organ-  The  ^lem- 

isations  are  not  available,  but  it  is  certainlv  within  the  truth  to  *^^^^ship  of 

'  -  American 

say  that  over  15  per  cent,  of  the  10.000,000  odd  men  returned  Unions 
by  the  census  of  igoo  as  employed  in  trade,  transportation,  and 
manufacturing    and    mechanical    pursuits    were    members    of 
unions.     Of  these    nearly  1,000,000  were  associated  with  the 
American  Federation  of  Labour.     The  membership  of  British 

*  On  June  i,  1903,  there  were  affiliated  with  the  American  Federa- 
tion of  Labour,  108  international  unions,  28  State  branches,  555  central 
bodies,  and  1988  local  trade  and  federal  labour  unions. 


388  The  Labour  Movement 

trade  unions  is  considerably  larger,  being  returned  as  1,905,000 

on  December  31,   1900.     This  is  due  partly  to  the  fact  that 

labour  is  there  more  fully  organised  and  partly  to  the  gre?ter 

preponderance  of  wage-earners  in  the  population. 

Of  British         The  British  Board  of  Trade  publishes  each  year  returns  indi- 
Unions  ^.        ^,  j.^.  ,    .  ...        .  .       , 

eating  the  condition  of  the    100  principal  unions  in  the  country, 

which  throw  interesting  light  on  different  phases  of  the  labour 
movement.  In  the  year  1900  these  unions  had  a  membership  of 
1,150,000  odd  and  an  income  aggregating  nearly  £2,000,000. 
Of  this  latter  they  spent  less  than  £1,500,000  and  they  closed 
the  year  with  a  surplus  averaging  £37,670  for  each  organisa- 
tion. The  principal  items  of  expenditure  for  the  year  were 
working  expenses,  25  per  cent,  of  total ;  unemployed  benefits, 
18  per  cent. ;  dispute  or  strike  benefits,  10  per  cent. ;  sick  and 
accident  benefits,  22  per  cent.;  superannuation  benefits,  13  per 
cent. ;  and  miscellaneous  benefits  and  grants,  12  per  cent.  Sim- 
ilar statistics  for  American  unions  would  undoubtedly  indicate 
smaller  proportionate  expenditures  on  benefit  features,  except 
strike  benefits,  and  larger  working  expenses.  American  unions 
are  also  less  well  supplied  with  surplus  funds  than  those  of 
Great  Britain. 
Importance  As  a  preparation  for  discussing  some  of  the  problems  that 
Questions  have  arisen  in  connection  with  the  labour  movement,  it  will  be 
well  to  review  briefly  the  development  of  the  law  in  reference 
to  labour  organisations  in  Great  Britain  and  the  United  States. 
The  intimate  relation  between  the  legal  systems  of  the  two 
countries  makes  an  understanding  of  the  English  law  on  this 
subject  indispensable  to  American  students  of  the  labour  prob- 
lem. 
The  §  221.  Until    1824,  combinations  of  workmen   designed  to 

ment  of "       raise  wages  or  shorten  hours  were  not  only  condemned  as  con- 
Trade  spiracies  under  the  common  law  of  Great  Britain,  but  were 
in  the            prohibited  by  statutes,  the  last  and  most  general  of  which  were 
United  passed  in  1799- 1800.    During  the  first  quarter  of  the  last  cen- 
tury. Parliament  was  brought  to  see  that  this  prohibition  was 
both  unfair  and  unenforceable,  and  repeal  followed  in  1824  and 
1825.    In  the  opinion  of  the  courts,  however,  this  did  not  alter 
the  common-law  rule  against  conspiracies,  and  in  consequence 
labour  organisations  continued  to  be  of  doubtful  legality  in 


English  Law  of  Conspiracy  389 

Great  Britain  until  expressly  permitted  by  the  Trade  Union 
Acts  of  1871  and  1876,  and  the  Conspiracy  and  Protection  of 
Property  Act  of  1875.  The  worst  phase  of  the  situation  which 
intervened  during  the  fifty  years  prior  to  1875  was  that  there 
was  no  clear  consensus  of  opinion  as  to  what  was  and  what  was 
not  conspiracy  under  the  common  law.  Even  when  not  pro- 
ceeded against  directly,  labour  unions  found,  when  they  wished 
themselves  to  proceed  against  defaulting  officials,  that  they 
enjoyed  no  legal  status,  and  hence  could  not  recover  damages, 
however  clear  the  evidence. 

The  acts  referred  to  not  only  sanctioned  labour  organisations  Growth 
by  declaring  that  in  future  no  action  in  connection  with  a  trade 
dispute  which  was  not  criminal  if  committed  by  an  individual 
should  be  indictable  as  a  conspiracy  because  committed  by  a 
number  of  individuals,  but  also  provided  for  their  registration 
and  for  the  protection  of  their  funds.  In  consequence  of  this 
encouragement  the  labour  movement  has  made  remarkable 
progress  in  Great  Britain  since  1875,  and  labour  organisations 
are  now  a  dominant  influence  in  determining  wages  and  condi- 
tions of  employment  in  many  branches  of  industry. 

§  222.  The  same  acts  which  legalised  trade  unions  amended  English 

the  criminal  law  so  as  to  remove  all  uncertainty  as  to  the  lengths  J:^^^  °.^ 

■^       .  °    .     Conspiracy 

to  which  workmen  might  go  in  their  efforts  to  miprove  their 
condition.  Thus  it  was  provided  (Act  of  1875)  that  malicious 
breach  of  contract  of  service  on  the  part  of  an  employee  of  a 
municipal  gas  or  water  company,  calculated  to  cut  off  all  the 
supply  of  either  of  these  necessary  commodities,  should  be  a 
criminal  offence  punishable  with  a  fine  or  imprisonment. 
Another  clause  declared  "  intimidation,"  "  persistent  follow- 
ing," "  hiding  tools  "  or  other  property,  "  watching  or  beset- 
ting "  a  house  or  work-place,  or  following  in  company  with  / 
others  "  in  a  disorderly  manner  "  with  a  view  to  inducing  a 
person  to  do  something  against  his  will,  to  be  crimes  if  com- 
mitted by  individuals,  and  consequently  conspiracies  if  com- 
mitted by  a  number  of  individuals  acting  in  concert.  Although 
there  has  been  some  diversity  of  opinion  as  to  the  meanings 
properly  attaching  to  these  different  phrases,  judicial  inter- 
pretation has  now  established  pretty  clearly  the  conduct  that 
is  permissible  in  Great  Britain  during  a  labour  dispute. 


390 


The  Labour  Movement 


Labour 
Unions 
Liable  for 
Damages 


The 
Law  in 
Reference 
to  Labour 
Unions  in 
the  United 
States 


For  some  time  after  the  Trade  Union  Acts  were  passed  it 
was  assumed  that  labour  organisations,  while  perfectly  legal 
and  able  (under  these  acts)  to  sue  their  own  officers,  were  with- 
out corporate  responsibility  and  consequently  not  themselves 
liable  to  suit  or  punishment.  This  view  has  been  dispelled  by 
recent  decisions  of  English  courts,  of  which  the  most  impor- 
tant was  rendered  by  the  House  of  Lords,  the  court  of  last 
appeal  under  the  English  system,  in  the  Tail  Vale  case  in  July, 
1901.  The  substance  of  this  ruling  was  that  a  labour  organisa- 
tion, although  not  a  corporation,  is  nevertheless  a  legal  entity, 
and  that,  as  such,  it  is  responsible  for  its  own  acts  and  the  acts 
of  its  authorised  agents  and  may  therefore  be  sued  and  mulcted 
in  damages  for  injuries  inflicted  by  itself  or  its  agents,  or  for 
failure  to  fulfil  its  legally  binding  contracts.  There  is  great  dif- 
ference of  opinion  as  to  the  effect  this  decision  is  likely  to  have 
on  the  progress  of  the  labour  movement.  That  it  will  compel 
labour  organisations  to  proceed  with  greater  circumspection 
than  in  the  past  is  evident.  So  far  as  this  results  in  greater 
regard  for  law  and  order  it  can  only  be  advantageous.  Its 
possible  bad  effects  are  found  in  the  danger  that  it  may  involve 
labour  organisations  in  ceaseless  and,  in  the  end,  useless  litiga- 
tion calculated  not  only  to  deplete  their  treasuries,*  but  to 
divert  them  from  their  proper  objects. 

§  223.  The  development  of  labour  organisations  in  the  United 
States  has  not  been  checked  to  any  appreciable  extent  by  legal 
restrictions.  Strikes  for  the  purpose  of  advancing  wages  or 
shortening  hours  have  rarely  been  held  to  be  illegal,  and  in 
many  of  the  States  they  are  expressly  authorised  by  statute. 
In  fact,  the  attitude  of  State  legislatures  has  been  uniformly 
favourable  to  labour  organisations,  some  of  them  even  going  to 
the  length  of  prohibiting  employers  from  discharging  employees 
on  the  ground  that  they  are  members  of  such  bodies.  Strikes 
for  other  purposes,  as,  for  example,  to  compel  an  employer  to 
reinstate  a  discharged  employee  or  to  discharge  an  employee 
who  is  not  a  member  of  the  union,  have  sometimes  been  con- 
demned as  conspiracies.  The  opposition  of  the  courts  in  such 
cases  has  been  based  not  on  hostility  to  labour  organisations  as 


*The  final  award  against  the  union  in  the  Taff  Vale  case  amounted 

to  ;i{^23,000. 


Influence  of  English  Precedents         391 

such,  but  on  a  desire  to  uphold  the  rights  of  persons  who  are 
not  members  of  them.  Thus  the  Court  of  Appeals  of  New 
York  State,  in  branding  as  a  conspiracy  the  effort  of  a  union  to 
secure  the  discharge  of  a  non-union  man,  used  the  following 
language :  "  Public  policy  and  the  interests  of  society  favour 
the  utmost  freedom  in  the  citizen  to  pursue  his  lawful  trade  or 
calling,  and  if  the  purpose  of  an  organisation  or  combination  of 
workingmen  be  to  hamper  or  restrict  that  freedom,  and  through 
contracts  or  arrangements  with  employers  to  coerce  other  work- 
ingmen to  become  members  of  the  organisation  and  to  come 
under  its  rules  and  conditions,  under  the  penalty  of  loss  of 
their  position  and  of  deprivation  of  employment,  then  that  pur- 
pose seems  clearly  unlawful  and  militates  against  the  spirit  of 
our  Government  and  the  nature  of  its  institutions."*  This 
decision  is  cited  because  a  few  years  laterf  the  same  court,  look- 
ing at  the  same  question  more  from  the  point  of  view  of  labour 
unions,  decided  that  a  strike  for  a  similar  purpose  was  lawful, 
on  the  ground  that  the  object  sought  was  not  the  injury  of  the 
non-union  employee,  but  the  preservation  of  the  union.  So  long 
as  there  seemed  to  be  no  malice  in  the  action,  and  violence  and 
intimidation  were  not  resorted  to,  it  was  held  that  the  incid^tntal 
injury  to  the  non-unionist  could  not  render  it  a  conspiracy.  Tli? 
reversal  of  opinion  illustrates  fairly  well  the  difficulties  which 
American  courts  encounter  in  their  efforts  to  apply  the  common 
law  of  conspiracy  to  labour  cases  and  explains  why  they  arrive 
at  such  diverse  conclusions  as  are  shown  by  the  authoritative 
decisions  of  the  courts  of  the  different  States.  It  would  be  a 
great  gain  if  the  whole  question  of  the  nature  of  conspiracy  in 
connection  with  trade  disputes  could  be  settled  by  statute  in  the 
United  States  as  it  was  in  Great  Britain  by  the  Act  of  1875. 

Until  quite   recently  the   view   that  unincorporated  labour  The 
organisations  were  not  liable  to  be  sued  for  damages  was  held  of  En^i^gh 
in  the  United  States  as  in  Great  Britain,  but  the  English  deci-  Precedents 
sions  cited  have  already  been  quoted  with  approval  by  American 
courts,  and  several  cases  are  now  on  record  in  which  labour 
organisations  as  such  have  been  sued  and  verdicts  against  them 

*  In  Curran  7's.  Gallen,  152  N.  Y.  33  (1897). 

fin  National   Protective   Association  z's.  Cummings,  170  N.  Y.  315 
(1902). 


The 

Ben&fit 
Features 
of  Labour 
Unions 


392  The  Labour  ■Movement 

awarded.  There  seems  every  reason  to  believe  that  laboui 
organisations  in  the  United  States  will  in  future  be  held  respon- 
sible for  their  o^vn  acts  and  the  acts  of  their  authorised  agents, 
even  though  they  be  unincorporated,  except  in  States  in  which 
they  are  expressly  relieved  from  responsibility  by  statute.  In  the 
less  highly  developed  condition  of  American  labour  unions  and 
of  American  judicial  opinion  on  the  labour  problem,  this  novel 
doctrine  may  serve  to  retard  the  progress  of  the  labour  move- 
ment even  more  than  it  is  likely  to  in  Great  Britain.  In  order 
that  it  may  not  prove  an  unfair  weapon  in  the  hands  of  employ- 
ers, the  acts  which  a  union  or  its  agents  may  commit  with 
impunity  during  the  progress  of  a  strike  should  be  clearly  set 
forth  in  statute  law. 

§  224.  As  indicated  in  the  statistics  given  in  Section  220,  ex- 
penditures for  benefits  constitute  a  chief  item  in  the  budgets  of 
trade  unions.  This  may  well  excite  surprise  on  the  part  of  per- 
sons who  look  upon  these  organisations  as  little  more  than 
strike  clubs,  and  requires  some  explanation.  The  benefits  paid, 
which  are,  as  noted,  for  unemployment,  accident,  illness,  super- 
annuation or  death,  are  defended  by  unionists  less  on  the 
ground  that  a  union  is  suited  to  act  as  an  insurance  company 
than  that  it  may  assume  this  function  with  little  added  expense, 
and  that  by  this  means  it  can  add  largely  to  its  resources  for  use 
in  time  of  emergency.  Mutual  insurance  is  not,  in  other  words, 
an  object  of  trade  unions  so  much  as  a  means  to  their  real 
object,  the  improvement  of  the  conditions  of  employment  for 
their  members.  The  ready  objection  to  the  use  of  benefit 
features  as  a  lure  to  attract  members  and  to  add  to  the  size  of 
the  strike  fund  is  that  it  may  lead  a  union  to  default  on  the 
benefit  pa\ments  it  has  promised  and  thus  in  the  end  do  it  and 
its  members  more  harm  than  good.  Unionists  maintain  that 
this  rarely  happens,  since,  after  a  strike,  members  are  usually 
willing  to  submit  to  higher  dues  until  the  surplus  is  restored. 
Another  objection  urged  by  unionists  themselves  is  that  benefit 
features  are  apt  to  make  union  officials  too  conservative  and  to 
divert  their  attention  from  the  primary  purpose  of  their  organi- 
sations. 

A  decision  as  to  the  wisdom  of  including  insurance, 
other  than   out-of-work   insurance,   among  the   functions  of 


Collective  Bargaining  393 

trade  unions  must  depend  upon  the  circumstances  of  each 
particular  case.  Where  no  better  mutual  insurance  asso- 
ciation is  available  such  an  extension  seems  not  only  justi- 
fied, but  called  for.  On  the  other  hand,  the  business  of  insur- 
ance is  not  one  for  which  a  trade  union  is  particularly  well 
adapted,  and  there  is  little  question  that  the  needed  service  can 
be  performed  more  cheaply  and  safely  by  an  association  having 
this  for  its  sole  object.  Such  associations,  called  "  friendly 
societies,"  are  already  numerous  in  Great  Britain  and  are  not 
unknown  in  the  United  States.  As  time  goes  on  there  seems 
reason  to  believe  that  they  will  gradually  relieve  the  unions 
of  this  particular  function. 

§  225.  Intelligent  unionists  rely  chiefly  upon  collective,  as  Collective 
distinguished  from  individual,  bargaining  to  secure  the  ad-  ^rgaining 
vances  in  wages  and  the  shortening  of  hours  for  which  they  are 
always  striving.  Recognising  the  weakness  in  bargaining 
power  of  the  isolated  workman,  they  advocate  trade  unions  as 
a  means  of  restraining  reckless  competition  for  employment  and 
of  securing  for  all  concerned  standard  rates  of  wages  which 
shall  equal  approximately  what  each  given  grade  of  labour  is 
worth  to  employers.  Where  employers  accept  the  plan,  wage 
scales  are  agreed  upon  by  conference  between  their  representa- 
tives and  representatives  of  the  union,  to  remain  in  force  usually 
for  a  year,  and  the  principal  task  of  union  officials  during  the 
intervals  between  bargaining  periods  is  to  maintain  the  integ- 
rity of  their  unions,  add  to  their  membership  if  possible,  and 
see  that  agreements  in  reference  to  wages  and  hours  are  lived 
up  to.  In  the  United  States  this  stage  of  development  has  been 
reached  in  only  a  few  trades.  In  most  of  them  employers  still 
insist  upon  the  older  method  of  fixing  wages  and  the  unions 
are  forced  to  carry  on  a  struggle  for  their  very  existence. 

The  objections  which  employers  make  to  collective  bargain-  Employers' 

ing  are  various.    Many  of  them  insist  that  thev  must  be  permit-  Objections 
^  ■'  -  ^  to  Collect- 

ted  to  manage  their  businesses  in  tluir  own  way  and  that,  while  ive 

they  are  always  ready  to  treat  with  their  own  employees,  they  Bargaining 

will  have  nothing  to  do  with  "  walking  delegates  "  or  other 

trade-union  officials  who  try  to  run  their  businesses  for  them. 

The  trade-union   reply  to  this  contention  is  that  wages  and 

hours  are  as  much  the  business  of  the  employee  as  of  the  em- 


394  The  Labour  Movement 

ployer,  and  if  the  former  prefer  to  leave  their  determination  to 
trained  representatives  they  have  as  good  a  right  to  do  so  as 
have  the  latter  to  hire  special  agents  to  treat  with  the  men  they 
employ.  Other  objections  are  that  the  demands  of  trade-union 
ofiticials  become  more  and  more  unreasonable  with  every  conces- 
sion that  is  made  to  them,  and  that  even  after  a  collective  bar- 
gain has  been  struck  the  employer  has  no  guarantee  that  it  will 
be  adhered  to  by  his  employees,  who  may  repudiate  their  own 
representatives.  Unionists  reply  that  while  there  are  all  kinds 
of  officials  among  trade  unions,  as  among  other  associations,  the 
acceptance  by  employers  of  the  principle  of  collective  bargain- 
ing is  a  sure  way  of  bringing  to  the  front  labour  leaders  of  a 
conciliatory  and  pacific  disposition.  They  point  to  the  undoubted 
fact  that  in  those  trades  where  collective  bargaining  has  been 
longest  practised  there  is  the  least  dissatisfaction  with  it  on  the 
part  of  employers.  The  likelihood  that  collective  bargains, 
formally  entered  into,  will  not  be  adhered  to  by  employees  is,  in 
the  opinion  of  the  unionists,  too  slight  to  deserve  serious  consid- 
eration. Only  in  cases  in  which  the  system  is  backed  by  a  weak 
union,  or  so  recently  adopted  as  not  to  be  understood  by  the 
workmen  concerned,  is  this  a  real  danger.  Finally,  employers 
object  to  the  standard  wage  on  the  ground  that  it  is  a  device 
for  securing  a  given  rate  of  pay  irrespective  of  the  amount  or 
quality  of  the  work  done.  They  complain  that  as  soon  as  a 
standard  wage  is  agreed  upon  employees  begin  to  devise  means 
of  scamping  their  work,  partly  to  spare  themselves  effort  and 
partly  in  the  belief  that  by  doing  less  work  themselves  they  will 
provide  employment  for  others,  who  must,  without  it,  either  be 
idle  or  work  for  less  than  the  standard  wages.  This  is,  doubt- 
less, the  most  serious  objection  to  the  standard  wage,  but  trade 
unionists  have  much  to  urge  on  the  other  side.  They  insist, 
first,  that  the  objection  can  apply  only  to  time  wages  and  that, 
as  a  matter  of  fact,  piece  wages  are  as  frequently  the  object  of 
collective  bargaining  as  the  former ;  second,  that  the  standard 
wage  is  only  a  minimum  wage  and  that  there  is  nothing  to 
prevent  the  employer  from  declining  to  hire  men  whose  work 
is  not  worth  so  much  to  him,  nor  from  paying  higher  wages  to 
men  whose  work  is  worth  more ;  finally,  that  under  the  com- 
petitive wage  system  employers  tend  to  drive  their  men  so  liard 


Conclusion  395 

that  they  hecome  prematurely  old,  and  that  the  latter  are  quite 
justified  in  using  the  power  that  association  gives  them  to  mod- 
erate somewhat  the  intensity  of  their  daily  efforts. 

It  is  very  difficult  to  strike  a  balance  between  these  opposing  Conclasion 
arguments.  There  is,  undoubtedly,  a  widespread  notion  among 
workmen  that  there  is  a  certain  amount  of  work  to  be  done  in 
the  world  and  that  unemployment  is  due  to  the  fact  that  this 
work  will  not  go  around  so  long  as  those  employed  continue  to 
labour  with  the  same  intensity.  This  notion  seems  to  have  more 
to  do  with  the  various  devices  that  are  resorted  to  to  curtail  the 
output  from  each  man's  efifort  than  laziness.  As  a  general 
proposition,  it  is  hardly  necessary  at  this  stage  to  insist  that  the 
view  that  men  may  make  work  for  others  by  doing  less  them- 
selves is  entirely  fallacious.  The  amount  of  work  that  is  to  be 
done  depends  upon  the  demand  there  is  for  goods  of  different 
kinds,  and  this  demand  comes  itself  from  goods.  If  in  every 
department  of  industry  the  productiveness  of  labour  should  be  ' 

reduced  by  lo  per  cent,  the  demand  for  labour  would  necessa- 
rily decrease  in  the  same  proportion.  The  same  conclusion  may 
be  inferred  from  the  theory  of  wages  that  has  been  explained. 
Under  freely  competitive  conditions  they  are  the  equivalent  of 
what  labour  produces,  and  if  workmen  deliberately  reduce  their 
productiveness  their  wages  must  be  reduced  proportionately. 
There  is  no  fund  other  than  what  workmen  produce  out  of 
which  wages  can  or  w\\\  for  any  length  of  time  be  paid.  The 
make-work  argument  for  curtailing  the  output  of  each  man's 
toil  is  thus  without  foundation,  and  the  policy  can  only  react 
to  the  disadvantage  of  the  whole  wage-earning  class.  On  the 
other  hand,  there  is  undoubted  truth  in  the  assertion  that  em- 
ployers often  desire  workmen  to  labour  with  an  intensity  that 
wears  them  out  in  a  few  years,  and  that  their  best  interests  and 
the  interests  of  society  demand  that  they  should  work  with 
more  moderation.  When  this  is  the  real  purpose  of  trade 
unions  in  curtailing  the  output  of  each  man's  labour,  the  policy 
is  justified,  even  though  it  must  involve  in  the  long  run  a  pro- 
portional lessening  of  wages.  Smaller  daily  earnings  spread 
out  over  a  greater  number  of  active  and  efficient  working  years 
are  better  from  every  point  of  view  than  higher  wages  secured 
at  the  cost  of  health  and  vitality. 


396  The  Labour  Movement 

strikes  and  §  226.  When  employers  decline  to  enter  into  collective  bar- 
gains, or  when  the  representatives  of  a  trade  union  cannot  come 
to  terms  with  representatives  of  an  employer,  a  strike  or  lockout 
is  apt  to  be  the  result.  The  former  is  a  general  cessation  of 
work  on  the  initiative  of  the  workmen ;  the  latter  a  similar 
stoppage  brought  about  by  employers.  Strikes  and  lockouts 
seem  at  first  thought  the  logical  accompaniments  of  collective 
bargaining.  When  a  single  workman  cannot  secure  the  wages 
or  hours  he  thinks  he  ought  to  have  he  declines  to  accept  em- 
ployment. Similarly,  an  employer  refuses  to  employ  on  terms 
that  are  not  agreeable  to  him.  Strikes  and  lockouts  appear  to 
be  similar  phenomena  transferred  to  the  larger  stage  of  col- 
lective bargaining.  There  is,  however,  a  vital  difference  in  the 
two  cases.  When  a  workman  declines  employment  or  an  em- 
ployer refuses  to  employ,  it  is  usually  with  the  expectation  of 
making  better  terms  with  someone  else.  This  alternative  is  not 
usually  presented  in  the  case  of  strikes  or  lockouts.  The  cessa- 
tion of  work  which  they  cause  is  complete  until  one  side  or  the 
other  gives  in,  when  work  is  resumed  by  substantially  the  same 
men  under  the  same  employer.  Strikes  and  lockouts  thus  mean, 
while  they  last,  idleness  and  loss  of  earnings,  with  all  of  their 
demoralising  consequences,  for  workmen ;  idle  capital,  depre- 
ciation of  plant  and  loss  of  business  for  employers,  and  cur- 
tailed production  of  goods  and  resulting  loss  in  want  satisfac- 
tion for  the  community.  Even  if  they  are  not  accompanied,  as 
is  so  frequently  the  case,  by  acts  of  violence  and  lawlessness, 
they  are  the  cause  of  loss  and  waste  on  a  scale  that  makes  them 
a  serious  obstacle  to  prosperity.  According  to  a  report  of  the 
Department  of  Labour,  losses  from  strikes  and  lockouts  in  the 
United  States  from  January  i,  1881,  to  June  30,  1894, 
amounted  to  $285,000,000.  The  number  of  establishments 
affected  was  75,000,  so  the  average  loss  amounted  to  $3790. 
An  even  more  significant  indication  of  the  costliness  of  strikes 
is  afforded  by  the  Report  of  the  Commission  on  the  Anthracite 
Coal  Strike.  This  estimates  that  the  strike,  which  lasted 
from  May  until  October,  1902,  involved  a  loss  in  receipts 
to  the  coal-mining  companies  of  $46,100,000,  of  which  some 
$25,000,000  would  have  been  paid  out  in  wages  had  work  been 
continued,  and  a  loss  in  freights  to  the  coal-carrying  railroads 


Use  of  the  Boycott  397 

of  $28,000,000.  The  inconvenience  and  actual  suffering  to 
which  the  pubhc  was  put  by  the  resulting  shortage  in  coal  can- 
not be  measured  in  money,  but  it  was  certainly  as  serious  as 
the  other  losses  combined. 

The  anthracite-coal  strike  illustrated  also  the  evils  of  vio-  Use  of  the 
lence  and  lawlessness  which  frequently  accompany  strikes.  In  J^The  Coal 
the  language  of  the  Commission  referred  to:  "Its  history  Strike 
[was]  stained  with  a  record  of  riot  and  bloodshed,  culminating 
in  three  murders,  unprovoked  save  by  the  fact  that  two  of  the 
victims  were  asserting  their  right  to  work,  and  another,  as  an 
officer  of  the  law,  was  performing  his  duty,  in  attempting  to 
preserve  the  peace.  Men  who  chose  to  be  employed,  or  who 
remained  at  work,  were  assailed  and  threatened,  and  they  and 
their  families  terrorised  and  intimidated.  In  several  instances 
the  houses  of  such  workmen  were  dynamited,  or  otherwise 
assaulted,  and  the  lives  of  unoffending  women  and  children 
put  in  jeopardy."  Nor  were  violence  and  intimidation  the  only 
means  resorted  to  by  the  strikers  and  those  who  sympathised 
with  them  to  prevent  others  from  remaining  at  work.  Free 
use  was  made  of  the  "  boycott,"  which  the  Commission  defines 
as  "  a  form  of  coercion  by  which  a  combination  of  many  per- 
sons seek  to  work  their  will  upon  a  single  person,  or  upon  a 
few  persons,  by  compelling  others  to  abstain  from  social  or 
beneficial  business  intercourse  with  such  person  or  persons." 
Among  the  many  examples  of  uses  of  the  boycott  brought  out 
in  hearings  before  the  Commission,  the  following  are  cited  in 
its  Report :  "A  young  schoolmistress  of  intelligence,  character, 
and  attainments  was  so  boycotted,  and  her  dismissal  from  em- 
ployment compelled  for  no  other  reason  than  that  a  brother, 
not  living  in  her  immediate  family,  chose  to  work  contrary  to 
the  wishes  and  will  of  the  striking  miners.  A  lad,  about  fifteen 
years  old,  employed  in  a  drug  store,  was  discharged,  owing  to 
threats  made  to  his  employer  by  a  delegation  of  the  strikers,  on 
behalf  of  their  organisation,  for  the  reason  that  his  father  had 
chosen  to  return  to  work  before  the  strike  was  ended.  In  sev- 
eral instances  tradesmen  were  threatened  with  a  boycott — that 
is,  that  all  connected  with  the  strikers  would  withhold  from 
them  their  custom,  and  persuade  others  to  do  so,  if  they  con- 
tinued to  furnish  the  necessaries  of  life  to  the  families  of  cer- 


398 


The  Labour  Movement 


Difficulty 
of  Enforc- 
ing Law 
during 
Strikes 


Plans  for 
Avoiding 
Strikes 


Trade 
Agree- 
ments 


tain  workmen,  who  had  come  under  the  ban  of  the  displeasure 
of  the  striking  organisations." 

The  violence,  intimidation,  and  boycotting,  which  accom- 
panied the  anthracite  strike,  differed  only  in  degree  from  what 
is  to  be  expected  in  connection  with  every  serious  labour  dis- 
turbance and  constitute  a  strong  argument  against  the  strikes 
and  lockouts  which  excite  them.  They  are  especially  apt  to  ac- 
company strikes,  for,  as  the  Anthracite  Strike  Commission 
declared,  "  there  can  be  no  doubt  that  without  threats,  intimi- 
dation, and  violence  toward  those  who  would  otherwise  be  will- 
ing to  remain  at  work,  or  take  the  places  of  those  who  had 
ceased  to  work,  the  coercion  of  employers,  which  a  strike  al- 
ways contemplates,  would  be  less  potent  in  compelling  ac- 
quiescence in  its  demands."  Such  acts  are,  of  course,  illegal, 
but  in  self-governing  communities  it  becomes  very  difficult  to 
enforce  the  law  when  the  sympathies  of  the  majority  are  on  the 
side  of  those  who  disregard  it.  Over  and  over  again  in 
the  United  States  it  has  proved  necessary  to  call  out  the  militia 
to  prevent  riot  and  bloodshed  in  connection  with  strikes  which 
have  passed  beyond  the  control  of  the  civil  authorities.  For 
these  reasons,  as  well  as  on  account  of  the  loss  and  incon- 
venience which  strikes  and  lockouts  entail,  several  plans  have 
been  proposed  for  the  peaceful  settlement  of  disagreements  in 
reference  to  wages,  hours,  and  other  conditions  of  employment. 

§  227.  Among  the  plans  for  rendering  strikes  and  lockouts 
unnecessary,  three  different  types  may  be  distinguished:  (i) 
those  which  rely  on  agreements  between  employers  and  em- 
ployees to  submit  differences  to  boards  of  arbitration  created 
by  themselves;  (2)  those  which  rely  upon  the  submission  of 
disputes  to  State  boards  of  conciliation  and  arbitration  and  the 
voluntary  acceptance  of  the  awards  of  the  latter;  (3)  those 
which  rely  upon  compulsory  arbitration  through  State  boards 
or  courts. 

Trade  agreements  providing  for  arbitration  when  collective 
bargaining  fails  of  its  purpose  are  already  common  in  Great 
Britain  and  to  a  less  extent  in  the  United  States.  After  a 
protracted  strike  or  lockout  both  employers  and  employees  are 
likely  to  recognise  the  desirability  of  some  arrangement  that 
will  preclude  similar  disturbances  in  the  future  and  out  of  this 


Conciliation  and  Arbitration  399 

feeling  some  plan  for  arbitrating  differences  is  very  apt  to 
develop.*  Such  plans  are  highly  beneficial  so  long  as  they  ac- 
complish their  purpose,  but  experience  seems  to  indicate  that 
they  can  only  deal  with  minor  differences  between  em- 
ployers and  employees.  When  important  issues  arise  on 
which  the  views  of  the  two  are  diametrically  opposed,  the  com- 
promise which  is  suggested  by  a  board  of  arbitration  may  be 
acceptable  to  neither.  In  such  cases  both  may  prefer  to  fight  it 
out  in  the  old  way.  If  the  award  of  the  board  is  less  in  the 
nature  of  a  compromise  than  a  yielding  of  the  whole  point  to 
one  side  or  the  other,  then  acceptance  by  the  aggrieved  party 
is  sure  to  be  grudging,  and  if  the  latter  feels  strong  enough  to 
undertake  a  struggle  the  whole  machinery  for  collective  bar- 
gaining may  be  repudiated.  The  situation  is  similar  to  that 
between  great  nations  which  have  agreed  to  refer  their  differ- 
ences to  arbitration  in  preference  to  going  to  war  about  them. 
Such  agreements  will  be  adhered  to  so  long  as  no  serious  dif- 
ferences arise,  but,  in  the  absence  of  any  outside  authority  to 
enforce  them,  they  are  very  likely  to  be  broken  when  one  or  the 
other  thinks  it  could  gain  more  by  fighting. 

Experience  with  the  failure  of  trade  agreements  to  super-  State 
sede  strikes  and  lockouts  has  led  most  countries  to  provide  of  Concilia- 
public  boards  of  conciliation  and  arbitration.     These  may  be  tion  and 
purely  voluntary  bodies  dependent  upon  the  invitation  of  one 
or  both  of  the  parties  to  the  trade  dispute  for  power  to  take 
any  part  in  it,  or  independent  to  the  extent  that  they  may 
investigate  the  causes  of  a  dispute  and  decide  as  to  its  merits, 
although  unable  to  compel  the  parties  concerned  to  accept  the 
decision  or  refrain  from  fighting  it  out  in  their  own  way  if 
they  prefer.     The  first  type  of  board  was  that  first  tried  in  the 
United  States,  and  it  was  soon  made  clear  that  in  a  great  ma- 
jority of  cases  neither  party  to  an  industrial  dispute  cares  to 
submit  it  to  arbitration  before  it  has  passed  beyond  the  point 
where  a  peaceful  settlement  can  be  effected.   This  conviction  has 

*  A  description  of  the  more  important  trade  agreements  in  opera- 
tion  in   the   United  States,  which   have   arbitration   as  one  of  their 
features,  is  given  in  the  Reports  of  Procei'diti^s  of  the  National  Con- 
ference on  Industrial   Conciliation   and  the  Industrial  Conference  of 
the  National  Civic  Federation,  1901  and  1902. 


400  The  Labour  Movement 

led  to  the  creation  in  Great  Britain  and  in  several  of  the  States 
of  the  United  States  of  boards  of  conciliation  and  arbitration 
which  have  power  to  investigate  the  causes  of  industrial 
disputes  on  their  own  initiative.  There  seems  reason  to  think 
that  much  more  might  be  done  along  this  line  in  the  United 
States.  In  a  great  majority  of  cases  the  outcome  of  a  labour 
dispute  is  determined  by  the  view  which  the  public  takes  of  the 
points  at  issue.  This  is  because  neither  side  is  strong  enough 
to  hold  out  against  the  other  plus  the  public.  The  great  diffi- 
culty is  that  without  some  means  of  self-education  the  public 
can  become  acquainted  with  the  grounds  for  a  labour  dispute 
only  after  it  has  gone  too  far  for  peaceful  settlement.  A  State 
board  of  conciliation  and  arbitration  with  power  to  intervene 
on  the  instant  that  it  learns  of  a  labour  dispute  may  at  times 
succeed  in  effecting  a  settlement  by  simply  bringing  the  parties 
together  and  suggesting  possible  bases  of  agreement,  at  the 
same  time  that  it  removes  misunderstandings  and  assuages 
wounded  feelings.  Failing  in  this  it  may,  by  making  public  its 
findings  in  the  case  and  indicating  clearly  the  settlement  which 
appears  to  it  fair,  bring  such  pressure  to  bear  upon  the  less  con- 
ciliatory disputant  that  a  compromise  will  seem  better  than  a 
fight  and  a  prolonged  strike  or  lockout  will  be  avoided.  Thus, 
although  without  power  to  enforce  its  award,  a  State  board  of 
conciliation  and  arbitration  may  often  prevent  strikes  and  lock- 
outs. 

Reasons  xhe  chief  justification  of  government  interference  to  settle 

for  Govern-        ,   ,  ,.  .       ,  ,  ,  ,.      .    ,  ,    .        , 

nieut  Inter-  ^  labour  dispute  is  that  the  public  interest  is  always  more  or 

ference  jgss  involved  and  that  for  the  sake  of  the  public  no  eftort  should 

be  spared  to  preserve  industrial  peace.  It  was  on  this  ground 
that  the  President  of  the  United  States  intervened  in  the  an- 
thracite-coal strike  already  referred  to.  In  its  Report  the  Com- 
mission, which  he  created,  declared  that  it  had  been  impressed 
by  "  the  apparent  lack  of  a  sense  of  responsibility  to  the  public 
at  large,  manifested  by  both  operators  and  mine  workers,  in  al- 
lowing the  controversy  between  them  to  go  to  such  an  extent  as 
to  entail  upon  millions  of  their  fellow-citizens  the  cruel  suffer- 
ing of  a  fuel  famine."  In  its  opinion,  it  continued,  "  the  ques- 
tions involved  in  [that]  controversy  were  not  of  such  impor- 
tance as  to  justify  forcing  upon  the  public  consequences  so 


Compulsory  Arbitration  401 

fraught  with  danger  to  the  peace  and  good  order  as  well  as  to 
the  well-being  and  comfort  of  society.  If  neither  party  could 
have  made  concessions  to  avoid  a  result  so  serious,  an  arbitra- 
tion would  have  prevented  the  extremity  which  was  reached." 
To  secure  such  a  result  in  future  the  Conmiission  recommended 
that  the  President  and  the  Governors  of  the  various  States  be 
given  power  to  appoint  "  commissions  of  compulsory  investiga- 
tion "  whenever  industrial  disputes  appear  to  them  of  sufficient 
importance  to  justify  such  a  course  and  that  such  commissions 
be  clothed  with  ample  powers  to  enable  them  to  collect  all  requi- 
site information  and  decide  intelligently  as  to  the  merits  of  the 
controversies.  The  utility  of  such  commissions  of  compulsory 
investigation  cannot  be  doubted,  and  it  is  to  be  hoped  that  the 
recommendation  may  be  followed  by  Congress  and  the  State 
legislatures. 

§  228.  In  the  United  States,  notwithstanding  the  disregard  Compulsory 

A      V*'*         4-* 

of  the  public  interest  so  characteristic  of  both  employers  and  ^  *  ^^  '°^ 
employees  during  the  progress  of  industrial  disputes,  there  is 
as  yet  little  demand  for  any  more  radical  remedy  than  com- 
pulsory investigation.  Nevertheless  the  experiments  that  are 
being  tried  in  Australasia  with  "  compulsory  arbitration  "  de- 
serve to  be  watched  with  attention.  The  same  forces  that  have 
led  all  countries  to  put  a  stop  to  civil  strife  and  insist  that  citi- 
zens who  cannot  agree  shall  bring  their  troubles  into  court 
rather  than  fight  over  them,  may  in  time  cause  the  adoption  of 
a  similar  policy  in  reference  to  industrial  strife.  If,  as  many 
competent  witnesses  maintain,  strikes  and  lockouts  can  be  en- 
tirely superseded  by  compulsory  arbitration  without  detriment 
either  to  employers,  employees,  or  the  public,  the  introduc- 
tion of  the  latter  in  all  progressive  countries  is  likely  to  be  a 
question  only  of  time  and  occasion. 

The  pioneer  in  the  field  of  compulsory  arbitration  was  New  New 
Zealand,  whose  first  law  making  strikes  and  lockouts  misde-  gystem 
meanours  was  passed  in  1894.  By  this  Act  the  country  was 
divided  into  seven  districts,  each  of  which  was  provided  with 
a  board  of  conciliation,  which  was  to  take  the  initiative  in  at- 
tempting to  adjust  differences  between  employers  and  em- 
ployees and  in  case  of  failure  to  refer  the  dispute  with  recom- 
mendations to  the   Court  of  Arbitration  also  created.     The 


402  The  Labour  Movement 

boards  of  conciliation  failed  so  often  to  settle  disputes  referred 
to  them  that  an  amendment  was  added,  in  1901,  permitting 
direct  reference  to  the  Court  of  Arbitration.  The  latter  con- 
sists of  three  judges,  one  a  judge  of  the  Supreme  Court,  and 
transacts  business  in  very  much  the  same  way  as  any  other 
tribunal.  It  has  power  to  subpoena  witnesses,  examine  books, 
and,  in  fact,  to  sift  the  cases  brought  before  it  to  the  very 
bottom.  The  decisions  or  awards  at  which  it  arrives  remain  in 
force  for  three  years  unless  superseded  by  subsequent  decisions, 
and  failure  to  comply  with  them  is  a  serious  offence.  As  a 
result  of  its  activity  nearly  every  trade  in  the  Colony  in  which 
industrial  disputes  may  arise  is  now  carried  on  under  stipula- 
tions as  regards  wages,  hours,  and  other  conditions  of  employ- 
ment laid  down  in  its  decisions.  The  system  has  thus  not  only 
put  a  stop  to  strikes  and  lockouts,  but  has  made  the  relations 
between  employers  and  employees  subject  to  judicial  determi- 
nation in  somewhat  the  same  way  that  they  were  in  England 
in  the  sixteenth  and  seventeenth  centuries. 
The  The  seeming  success  of  New  Zealand's  experiment  induced 

New  South    New  South  Wales  to  send  a  special  commissioner  to  that  coun- 
Wales  try  in  190 1  to  study  its  operation.     His  report  was  so  favour- 

able that  New  South  Wales  also  adopted  the  system  of  com- 
pulsory arbitration,  as  a  substitute  for  strikes  and  lockouts,  in 
1902.  Western  Australia  had  adopted  it  a  year  earlier,  so  it 
is  now  in  operation  in  three  of  the  states  of  Australasia.  The 
system  of  New  South  Wales  differs  from  its  model  in  that  it 
provides  no  local  boards  of  conciliation,  but  requires  the  refer- 
ence of  all  disputes  to  the  Central  Court  of  Arbitration.  It 
also  requires  that  the  awards  of  the  latter  shall  apply  not  merely 
to  the  disputants,  but  to  the  whole  trade  which  they  represent. 
Thus  the  result  which  has  been  achieved  somewhat  unexpect- 
edly in  New  Zealand,  that  is,  a  comprehensive  labour  code  to 
govern  the  relations  between  employers  and  employees  through- 
out the  whole  country,  is  deliberately  aimed  at  in  New  South 
Wales.  This  code  is  subject  of  course  to  modification  through 
the  law-making  power,  but,  with  the  labour  legislation  con- 
sidered in  the  next  chapter,  it  sets  very  definite  limits  to  free 
competition  and  free  contract  as  regulators  of  industrial  rela- 
tions.    Compulsory  arbitration  is  still  in  the  experimental  stage 


Use  of  the  Injunction  403 

and  too  novel  to  be  judged  either  a  failure  or  a  success,  but  it 

certainly  merits  the  consideration  of  all  countries  interested  in 

the  solution  of  the  strike  problem. 

§229.  Experience  with  the  violence  and  disorder  which  so  Use  of  the 

frequently  accompany  strikes  has  led  in  the  United  States  to  Injunction 
^  -^  *       •'  in  Connec- 

the  free  use  of  the  judicial  process  called  "  the  injunction."  tion  with 

This  was  developed  by  English  courts  as  a  means  of  prevent-  Strikes 
ing  irreparable  or  continuing  injuries  to  property  for  which,  in 
the  nature  of  the  case,  if  the  injury  were  permitted  to  occur, 
no  adequate  damages  could  be  secured.  The  peculiarity  about 
the  process  is  that  when  a  court  issues  an  injunction,  violation 
of  its  order  becomes  in  effect  contempt  of  court  and  exposes  the 
guilty  person  to  such  punishment  as  the  court  itself  may  de- 
cree. The  ordinary  protections  accorded  to  criminals,  such  as 
trial  by  jury,  the  right  to  be  represented  by  counsel,  etc.,  are 
set  aside,  and  the  offended  tribunal  becomes  itself  prosecutor, 
judge,  and  jury  all  in  one.  The  inevitable  tendency  of  the  sys- 
tem is  to  deprive  trials  in  injunction  cases  of  that  judicial 
temper  which  should  characterise  the  relation  between  a  court 
and  an  accused  person,  no  matter  what  his  offence. 

The  applicability  of  the  injunction  process  to  labour  dis-  Legal 
turbances  is  very  clear.  Workmen  on  strike  are  very  apt  to  t^Q^' 
commit  acts  of  lawlessness  which  involve  the  destruction  of 
property  and  the  interruption  of  business.  Moreover  they  are 
usually  irresponsible  persons  in  the  sense  that  it  would  be  im- 
possible by  means  of  a  civil  suit  for  damages  to  secure  redress 
after  the  injury  had  been  inflicted.  On  these  grounds  courts 
readily  issue  injunctions  to  restrain  workmen  from  doing 
illegal  acts  which  involve  the  destruction  of  property.  Injunc- 
tions have  even  been  issued  ordering  workmen  not  to  strike,  on 
the  ground  that  strikes  interrupt  business  and  cause  loss,  but 
the  best  authority  gives  no  countenance  to  such  use. 

From  being  express  orders  to  designated  individuals  to  do  or  Extension 
to  refrain  from  doing  specified  acts,  injunctions  have  devel-  injunctions 
oped  in  the  United  States  into  sweeping  commands  to  an  in- 
definite number  of  persons  ordering  them  not  only  not  to  do 
certain  things,  but  to  keep  the  peace  in  general.  In  the  famous 
Debs  case,  growing  out  of  the  Pullman  strike  in  1894,  an  in- 
junction was  issued  by  a  circuit  court  of  the  United  States  to 


404 


The  Labour  Movement 


Reasons  for 
Opposing 
Resort  to 
Injunctions 


The  In- 
fluence of 
Labour 
Unions  on 
Wages 


members  of  the  American  Railway  Union  and  "  all  other  per- 
sons whomsoever,"  enjoining  them  from  in  any  way  interfer- 
ing with  the  business  of  twenty-three  great  railwa}-  s}'stems 
engaged  in  carrying  the  mails,  and  this  notwithstanding  the 
fact  that  interfering  with  the  carrying  of  the  mails  is  itself  a 
crime ! 

Space  will  not  permit  a  full  discussion  of  the  arguments  for 
and  against  the  use  of  the  injunction  as  a  means  of  preventing 
violence  and  disorder  in  connection  with  strikes.  Perhaps  the 
strongest  argument  against  such  use  is  that  in  the  present  state 
of  public  opinion  on  the  subject  it  rarely  attains  the  object 
aimed  at.  Employers  have  in  fact  been  brouglit  to  the  convic- 
tion that  an  appeal  to  the  courts  in  connection  with  a  strike  is 
likely  to  do  more  harm  than  good.  In  the  opinion  of  the  writer 
the  prejudice  of  peaceable  and  law-abiding  workmen  against 
the  injunction  is  well  founded.  Most  of  the  acts  enjoined  are 
themselves  criminal  and  punishable  by  criminal  process.  For 
the  courts  to  interfere  in  such  cases  to  protect  property  is  in 
reality  to  deprive  criminals  of  the  protection  to  which  they  are 
entitled  in  a  cbimtry  which  justly  prides  itself  on  its  free  in- 
stitutions. That  the  purpose  of  the  interference  is  not  the 
punishment  of  crime  does  not  alter  this  essential  fact.  Prec- 
edents for  resort  to  the  injunction  are  too  well  established  to 
permit  anything  but  a  gradual  abandonment  of  the  practice, 
but  it  may  be  hoped  that  in  its  use  courts  will  pay  increasing 
regard  to  the  practical  effects  of  their  procedure.  If  they 
would  refrain  from  issuing  injunctions  to  "  all  persons  whom- 
soever," as  in  the  Debs  case,  and  confine  punishment  for  con- 
tempt to  imprisonment  until  the  emergency  which  makes  dis- 
regard of  the  injunction  probable  has  passed,  the  worst  abuses 
that  have  been  charged  to  the  practice  would  be  avoided  with- 
out any  impairment  of  its  efficiency  as  a  means  to  the  prompt 
suppression  of  disorder. 

§  230.  The  theory  of  wages  that  has  been  explained  in  these 
pages  is  that  under  conditions  of  free,  all-sided  competition 
workmen  will  be  able  to  secure  wages  corresponding  closely  to 
the  additions  their  labour  makes  to  the  value  of  the  product. 
We  have  now  to  inquire  what  effect  the  presence  of  trade 
unions  has  upon  the  operation  of  this  law.     Do  they  serve 


The  Case  of  Open  Unions  405 

merely  to  equalise  conditions  between  employers  and  employees 
so  that  the  competition  between  them  is  really  freer  because 
fairer,  or  do  they  introduce  an  element  of  monopoly  on  the  side 
of  labour  which  enables  workmen  to  secure  more  than  free 
competition  would  bring  to  them  ?  In  the  opinion  of  the  writer 
their  influence  in  all  but  exceptional  cases  is  confined  to  the 
first  effect.  In  most  trades  in  the  United  States  there  are  both 
union  and  non-union  men  seeking  employment.  The  former 
are  striving  constantly  to  induce  the  latter  to  unite  w'ith  them 
in  the  effort  to  secure  better  terms  from  the  employers,  but 
because  of  selfishness,  short-sightedness,  indifference,  or  some 
other  reason,  there  are  always  some  of  the  latter  who  refuse  to 
do  so.  As  a  consequence  of  this  situation  there  is  a  source  of 
supply  on  which  employers  may  draw  for  their  labour  in  case 
of  emergency,  which  the  unions  are  unable  to  control.  The 
competition  for  employment  of  this  non-unionised  labour  sets 
a  limit  to  the  influence  which  the  unions  may  have  upon  wages. 
The  very  best  they  can  do  for  their  members  is  to  secure  for 
them  the  full  competitive  rate.  If  they  try  to  secure  more  em- 
ployers will  refuse  to  employ  all  of  them,  defections  to  the 
ranks  of  the  non-unionists  will  occur,  and  the  competition  for 
employment  of  the  latter  will  break  down  the  standard  rate. 
On  the  other  hand,  if  they  follow  their  own  interest  intelligently 
they  can  secure  not  only  for  their  own  members,  but  for  all  the 
workmen  in  the  trade,  the  full  competitive  rate  of  wages. 
Representative  employers  can  afford  to  pay  this  and  will  do  so 
if  their  ability  in  bargaining  is  matched  on  the  other  side.  The 
services  the  unions  perform  in  securing  this  result  may  be  sum- 
marised under  the  following  heads  :  ( i )  they  are  organised  to 
resist  unfair  terms  and  to  cause  loss  to  the  employer  who  at- 
tempts to  cut  wages  below  the  fair  competitive  rate;  (2)  they 
keep  workmen  informed  as  to  th.e  rates  that  are  actually  paid 
and  in  this  way  protect  them  from  making  bad  bargains 
through  ignorance;  (3)  they  inform  themselves  in  regard  to 
general  market  conditions  and  force  employers  to  advance 
wages  when  conditions  are  favourable,  more  promptly  than 
they  would  without  such  coercion. 

The  above  account  of  the  influence  of  trade  unions  fails  to  T'le  Case 
consider  trades  in  which  all  or  practically  all  workmen  belong  Unions 


4o6  The  Labour  Movement 

to  unions.  Such  trades  are,  as  stated,  rare  in  the  United  States 
and  even  in  Great  Britain,  but  that  makes  them  no  less  inter- 
esting, since  they  represent  the  type  whose  reahsation  is  the 
goal  of  trade  unionists'  efforts.  The  influence  of  the  unions 
on  wages  in  such  trades  depends  upon  their  policy  in  reference 
to  the  admission  of  new  members.  This  policy  is  determined 
in  most  factory  employments  by  the  ease  with  which  the  task 
to  be  performed  can  be  mastered.  When,  as  in  the  textile 
trades,  no  long  apprenticeship  is  necessary,  the  unions  must 
admit  everyone  to  membership  whom  employers  will  hire, 
on  pain  of  losing  control  over  the  industry.  When  a  union  is 
open  in  this  way  to  all  comers  the  rate  of  wages  which  it 
can  secure  for  its  members  cannot  exceed  the  competitive 
rate  for  workmen  of  the  given  grade  of  skill.  If  it  did 
employers  could  not  afford  to  hire  all  of  the  members  of 
the  union.  The  unemployed  would  become  dissatisfied  and 
either  leave  the  unions  or  force  them  to  lower  the  standard  rate 
until  the  demand  should  absorb  them  as  well  as  their  more  for- 
tunate fellows.  In  either  event  the  standard  rate  would  be 
brought  to  correspond  closely  to  the  competitive  rate,  as  it  was 
by  the  competition  of  non-unionists  in  the  previous  case. 
Labour  §231.  There  are  some  trades  in  which  the  unions  control 

Sometimes  practically  the  entire  labour  force  and  in  which  conditions 
Monopolies  permit  the  use  of  such  control  as  a  means  to  securing  monopoly 
earnings.  These  are  trades  in  which  a  long  period  of  appren- 
ticeship is  necessary  to  the  mastery  of  the  tasks  to  be  performed 
or  in  which  legal  obstacles,  such  as  the  requirement  of  a  cer- 
tificate of  proficiency  as  a  condition  to  engaging  in  the  trade, 
prevent  any  sudden  increase  in  the  number  of  master-work- 
men.. When  a  trade  union  becomes  strong  enough  in  a  trade 
of  this  type  to  limit  the  number  of  apprentices,  or  to  determine 
the  period  of  apprenticeship  or  the  severity  of  the  examination 
necessary  to  entrance  to  the  trade,  it  may  exercise  effective  con- 
trol over  the  supply  of  competent  workmen.  By  limiting  such 
supply  it  may  secure  a  virtual  monopoly  for  its  members  and 
advance  their  wages  to  any  point  which  the  demand  for  their 
services  permits.  The  management  of  such  a  monopoly  calls 
of  course  for  tact  and  skill  because  it  has  to  contend  wdth  the 
opposition  of  other  workmen,  who  would  like  to  learn  the  trade 


Laws  Helpful  to  Unions  407 

and  are  prevented  from  doing  so,  with  the  opposition  of  em- 
ployers who  object  to  paying  such  high  wages,  and  with  the 
opposition  of  the  consuming  pubHc  which  objects  to  paying 
high  prices  for  the  products  of  the  labour  monopoly.  Never- 
theless such  monopolies  have  existed  and  do  exist,  and  the 
realisation  of  them  is  the  deliberate  purpose  of  many  trade 
unionists. 

In  the  United  States  there  are  both  State  and  national  laws  State  and 
that  directly  further  the  monopolistic  ambitions  of  trade  unions.  Law/nelp- 
The  State  of  Pennsylvania  has  a  law  requiring  men  who  wish  ful  to 
to  become  master  miners  to  work  as  helpers  for  a  certain  period  "'^^^^ 
and  to  pass  then  a  State  examination.  New  York  State  has 
similar  laws  in  reference  to  plumbers  and  horse-shoers.  The 
purpose  of  such  statutes  is  of  course  to  insure  a  certain  degree 
of  proficiency  on  the  part  of  workmen  who  perform  these  im- 
portant services,  but  that  they  assist  trade  unions  in  their  efforts 
to  control  the  supply  of  labour  in  their  trades  is  beyond  ques- 
tion. A  Federal  law  which  operates  in  the  same  direction  is 
that  prohibiting  the  entrance  into  the  country  of  workmen 
under  contract  of  employment.  It  might  appear  on  general 
principles  that  the  immigrant  w^hose  reputation  at  home  was 
such  that  he  could  secure  a  contract  of  employment  from  an 
employer  in  this  country  would  be  a  better  citizen  than  the  im- 
migrant who  was  attracted  only  by  the  vague  hope  of  bettering 
his  condition,  but  this  view  disregards  the  special  interest  of 
those  with  whom  the  newcomer  would  compete  for  employ- 
ment. From  their  point  of  view,  as  voiced  by  the  trade  unions, 
the  contract  labourer  is  a  much  less  desirable  acquisition  than 
the  mere  immigrant.  The  former  enters  the  country  as  a  non- 
unionist,  or  "  scab,"  at  the  very  outset  and  the  possibility  of 
hiring  him  may  enable  an  employer  to  be  quite  mdependcnt  of 
a  labour  organisation  which,  but  for  this  outside  competition, 
could  control  the  labour  supply  in  the  particular  trade.  The 
law  which  prevents  such  resort  to  the  foreign  labour  market  to 
break  a  strike  has  assisted  trade  unions  in  the  United  States  to 
win  more  than  one  victory.  So  far  as  it  enables  them  to  main- 
tain higher  wages  for  American  workmen  in  all  brandies  of 
industry — and  this  is  believed  to  be  its  principal  effect — 
its  influence   is  beneficial,   but   when   it   serves   to   confirm   a 


4o8 


The  Labour  Movement 


Monopolis- 
tic Unions 
to  be  Con- 
demned 
Like  other 
Monopolies 


Educa- 
tional 
Work  of 
Labour 
Unions 


close  union's  monopoly  of  the  labour  suppl}-  in  its  particular 
trade  and  to  enable  those  benefited  to  secure  monopoly  earn- 
ings, the  result  is  obtained,  as  in  the  case  of  other  monopoly 
incomes,  at  the  expense  of  the  whole  community.  It  injures 
consumers  since  it  compels  them  to  pay  higher  prices  for  the 
goods  whose  production  is  controlled  by  the  labour  monopoly, 
and  it  injures  other  workmen  since  it  limits  the  field  of  employ- 
ment open  to  them  and  forces  wages  in  other  trades  down  to 
lower  levels  than  would  result  from  free,  all-sided  competition. 

In  the  United  States  few  trade  unions  have  succeeded  in 
establishing  labour  monopolies,  but  in  the  building  trades,  in 
the  glass  industry,  and  in  a  few  other  employments  such 
monopolies  are  complained  of.  That  they  are  as  much 
open  to  public  condemnation  as  any  other  species  of  mo- 
nopoly not  controlled  in  the  general  interest  seems  to  the 
author  too  clear  for  argument.  Unions  which  make  such 
control  of  the  labour  supply  in  their  trades  the  object  of 
their  efforts  and  seek  to  realise  it  by  limiting  the  number 
of  apprentices,  charging  exorbitant  initiation  fees,  refusing 
to  work  with  non-unionists,  and  using  every  means  from 
strikes  to  intimidation  and  violence  to  prevent  the  latter 
from  gaining  a  foothold  in  the  trade,  m,ust  expect  to  meet 
the  same  criticism  that  is  levelled  against  the  trusts  and  other 
would-be  monopolies.  All  of  these  policies  except  intimi- 
dation and  violence  are  defensible  as  means  to  maintaining 
standards  of  workmanship  and  standards  of  pay  proportionate 
to  earnings  in  other  trades.  None  of  them  are  defensible  as 
means  of  preventing  ambitious  and  competent  men  from  mas- 
tering the  trades  concerned  and  deriving  the  same  benefits 
from  their  energy  and  enterprise  as  do  those  already  in  the 
trade.  Trade  unionists  will  do  well  themselves  to  note  the 
distinction  between  labour  organisations  aiming  to  promote 
the  interests  of  labour  generally  and  labour  monopolies  aiming 
to  promote  the  interests  only  of  the  fortunate  few  who  happen 
to  be  members  at  the  expense  of  the  many  who  are  not. 

§  232.  In  addition  to  the  purposes  that  have  been  considered 
trade  unions  have  other  objects  that  deserv^e  commendation. 
Perhaps  the  most  important  aspect  of  their  work  is  the  educa- 
tional.    By  bringing  their  members  together  to  discuss  ques- 


Labour  Unions  and  the  Public  409 

tions  of  common  interest  they  do  a  great  deal  to  make  tlicm 
more  intelligent  and  broader  in  their  insight  into  economic  and 
political  problems.  The  experience  which  workmen  get  in 
managing  their  unions  helps  them  to  appreciate  the  importance 
of  organisation  as  a  condition  to  success  and  to  perceive  the 
value  of  the  industrial  service  which  their  employers  render. 
In  the  same  way  the  accumulation  and  administration  of  the 
funds  which  they  collect  gives  them  clearer  notions  in  refer- 
ence to  the  origin  and  service  of  capital.  From  these  facts  it 
results  that  leading  trade  unionists  are  apt  to  be  men  of  unusual 
ability,  whose  views  on  the  labour  question  are  conservative 
rather  than  radical  and  who,  in  the  absence  of  personal  preju- 
dice, command  the  respect  and  esteem  of  employers  almost  as 
much  as  of  their  fellow  workmen. 

The  most  important  book  dealing  with  trade  unions  in  Eng-  Schools  of 
land  tiiat  has  yet  appeared  bears  the  significant  title,  "  Indus-  ^Citizenship 
trial  Democracy."  This  makes  prominent  another  service  that 
trade  unions  render.  As  miniature  democracies  they  reproduce 
on  a  smaller  scale  the  self-governing  states  on  whose  success 
the  future  so  largely  depends.  Their  members  learn  in  them 
how  to  give  way  when  they  cannot  persuade,  how  to  sacrifice 
smaller  for  greater  ends,  and  in  general  how  to  defer  grace- 
fully to  the  opinions  and  prejudices  of  others — qualities  which 
are  essential  to  the  successful  working  of  democratic  institu- 
tions. The  authors  of  the  work  referred  to,  Mr.  and  ]\Irs. 
Webb,  conclude  that  trade  unions  are  preparing  the  way  for 
the  great  co-operative  commonwealth  or  socialistic  state  which 
they  think  is  in  process  of  development.  Whether  they  are 
right  in  this  anticipation  or  not,  there  can  be  no  question  of  the 
value  of  membership  in  a  trade  union  as  training  for  useful 
citizenship. 

Still  another  service  rendered  bv  trade  unions  is  in  connec-  Active  in 
tion  with  labour  legislation.     Through  their  very  position  trade  Needed^ 
unionists  are  led  to  recognise  the  need  for  labour  laws  before  it  Labour 
is  appreciated  by  the   whole  community.     Again   and   again      ^^^^ 
in   Great   Britain   and    the   United   States  their  agitation   has 
secured    the   enactment   of  beneficent   labour   regulations.     It 
would  be  exaggerated  praise  to  ascribe  to  them  all  the  progress 
that  has  been  made  in  this  field,  or  to  maintain  that  thev  have 


4IO 


The  Labour  Movement 


The  Future 
of  the 
Labour 
Movement 


not  at  times  agitated  for  bad  as  well  as  for  good  labour  laws ; 
at  the  same  time  trade  unions  deserve  more  credit  than  any 
other  single  agency  for  what  has  been  accomplished. 

§  233.  Prediction  in  reference  to  the  future  of  trade  unions 
would  be  both  hazardous  and  out-of-place  in  this  connection, 
but  a  few  suggestions  may  be  ventured  as  a  conclusion  to  this 
sketch  of  the  labour  movement.  There  can  be  little  question 
that  trade  unions  have  come  to  stay  so  long  as  the  present  or- 
ganisation of  industrial  society  is  maintained.  For  employers 
to  fight  against  them  is  as  idle  as  it  is  for  the  whole  community 
to  fight  against  combination  and  organisation  on  the  side  of 
employers  themselves.  What  is  to  be  opposed  is  not  trade 
unions,  which  deserve  encouragement  and  assistance  on  the  part 
of  all  who  are  really  interested  in  the  improvement  of  the  work- 
ing masses,  but  the  monopolistic  tendencies  of  unions.  The 
latter  are  bad,  not  alone  for  the  reasons  enumerated,  but  because 
they  foster  a  type  of  labour  leader  who  thrives  on  corruption 
and  blackmail,  rather  than  because  of  his  services  to  the  cause 
of  labour.  The  indications  of  these  monopolistic  tendencies  are 
rules  which  limit  apprentices,  not  by  requiring  that  period  of 
tuition  necessary  to  thorough  mastery  of  the  trade,  but  abso- 
lutely, so  that  the  supply  of  master  workmen  is  prevented  from 
growing  with  the  expansion  of  the  demand  for  their  services ; 
high  initiation  fees  and  other  bars  to  free  entrance  to  the  union 
on  the  part  of  men  competent  to  carry  on  the  trade,  coupled 
with  uncompromising  hostility  to  non-unionists ;  opposition  to 
manual  training,  trade  schools,  and  other  plans  for  increasing 
the  industrial  efiiciency  of  the  whole  working  population,  and, 
in  short,  disregard  of  the  interests  of  workmen  generally 
through  exclusive  regard  to  the  interests  of  members  of  par- 
ticular unions.  These  phases  of  trade  unionism  ought  to  be 
opposed  not  only  by  employers,  but  by  all  disinterested  students 
of  the  labour  problem.  They  are,  of  course,  no  more  blame- 
worthy on  the  part  of  workmen  than  are  similar  efforts  on  the 
part  of  other  individuals  who  would  like  to  protect  themselves 
from  the  wearing  pressure  of  competition  and  enjoy  monopoly 
earnings,  but  they  are  socially  disadvantageous  and  therefore 
to  be  frowned  upon.  The  future  of  trade  unions  must  depend 
largely  on  the  promptness  with  which  workmen  and  the  public 


Future  of  the  Labour  Movement        41 1 

learn  to  distinguish  between  the  good  and  the  bad  in  the  labour 
movement,  and  tlic  thoroughness  with  wdiich  the  latter  is 
stamped  out  by  public  opinion  backed,  if  need  be,  by  repressive 
legislation. 

REFERENCES  FOR   COLLATERAL   READING 

The  literature  of  the  labour  movement  in  the  United  States  is,  con- 
sidering the  importance  of  the  subject,  extremely  limited.  The 
following  titles  deserve  mention  :  Ely,  The  Labour  Movement  in 
America  (now  out  of  date),  and  article  on  *Trade  Unions  (in  the 
New  International  Encyclopaedia);  *  Brooks,  The  Social  Unrest; 
*Levasseur,  The  American  Workman  ;  ^Mitchell,  Organised 
Labour;  National  Conference  on  Industrial  Conciliation  and  In- 
dustrial Conference  of  the  National  Civic  Federation,  igoi  and 
aQ02  ;  Reports  of  the  United  States  Department  of  Labour  ;  Bul- 
letins of  the  United  States  Department  of  Labour  ;  Reports  and 
Bulletins  of  the  Bureau  of  Labour  of  ]\Iassachusetts  ;  Reports 
and  Bulletins  of  the  Department  of  Labour  of  New  York  (these 
official  publications  are  invaluable  sources  of  information)  ;  The 
American  Federationist  (published  by  the  American  Federation 
of  Labour)  ;  Report  of  the  Commission  on  the  Anthracite  Coal 
Strike  (1903);  Report  of  the  United  States  Industrial  Commission, 
Vols.  VII.,  VIII.,  XII.,  XIV.,  and  XVIL;  *Adams  and  Si{7nner, 
Labour  Problems;  *Gtlman,  Methods  of  Industrial  Peace;  *Co7n- 
mons.  Trade  Unionism  and  Labour  Problems. 

Tlie  labour  movement  in  Great  Britain  receives  consideration  in  the 
following  works  :  *Sydney  and  Beatrice  Webb,  Industrial  Democ- 
racy, and  History  of  Trade  Unionism  ;  Reports  of  the  Board  of 
Trade  (British)  on  Labour  Statistics  ;  df  Kous/crs,  The  Labour 
Question  in  Britain;  *  Drage,  The  Labour  Problem;  *  Report 
of  the  Royal  Commission  on  Labour  (1894) ;  Howell,  Trade  Union 
Law,  and  Labour  Legislation,  Labour  Movements  and  Labour 
Leaders. 

New  Zealand's  experiment  with  Compulsory  Arbitration  is  discussed 
in  the  Report  which  Judge  Backhouse  prepared  for  New  South 
Wales  entitled,  *Report  of  the  Royal  Commission  on  the  Working  of 
Compulsory  Arbitration  Laws,  and  in  Chap.  I.,  Vol.  II.,  of  *  Reeves, 
State  Experiments  in  Australia  and  New  Zealand  (bibliography). 


CHAPTER  XXII 


THE   LEGAL   REGULATION    OF    LABOUR 


Reasons  for 
the  Legal 
Regulation 
of  Labour 


Employees 
Do  Not 
always 
Bargain  on 
Equal 
Terms  with 
Employers: 
Children 


Women 


§  234.  The  laissez-faire,  or  let  alone,  policy,  which  was  sub- 
stituted for  the  policy  of  legal  restriction  in  Great  Britain  dur- 
ing the  first  half  of  the  last  century,  has  been  subject  to  one 
important  exception.  It  has  never  been  allowed  to  include 
fully  the  relations  between  employer  and  employee.  Reasons 
for  this  exception  were  suggested  in  the  last  chapter,  but  they 
must  now  be  explained  at  greater  length  as  an  introduction  to 
a  brief  discussion  of  the  labour  laws  in  force  in  different  coun- 
tries and  the  need  of  still  further  restrictions. 

Unorganised  workmen  do  not  bargain  on  terms  of  strict 
equality  with  employers.  That  this  is  the  case  when  the 
workers  are  children  will  scarcely  be  questioned  by  anyone. 
Employers  of  such  labour  stand  to  it  in  a  relation  half  paternal 
and  have  it  in  their  power  to  make  or  mar  the  young  lives  that 
are  devoted  to  their  service.  It  might  be  thought  that  con- 
siderations of  common  humanity  would  lead  employers  of  chil- 
dren to  fix  hours  and  other  conditions  of  employment  that 
would  not  be  injurious  to  them.  Unfortunately  this  is  not  the 
case.  In  every  country  labour  laws  have  been  found  neces- 
sary to  protect  children  from  the  rapacity  and  cruelty  not  only 
of  employers,  but  even  of  their  own  parents. 

It  is  generally,  although  not  universally,  conceded  that  pro- 
tective labour  laws  ought  to  extend  to  women  as  well  as  to 
minors.  Such  extension  is  defended  by  those  who  think  the 
activity  of  women  should  be  confined  as  far  as  possible  to  the 
domestic  circle,  on  the  ground  that  women  are  unfitted  for  the 
rough  and  tumble  of  industrial  competition  and  if  permitted  to 
work  for  wages  at  all,  should  do  so  on  conditions  marked  out 
for  them  by  law.  A  reason  less  open  to  objection  is  the  simple 
fact  that  women  have  not  yet  learned  to  organise  unions  or  to 
protect  themselves  in  other  ways  and  are  therefore  the  prey  of 
unscrupulous  employers  when  the  law  fails  to  protect  them. 

412 


Purpose  of  Protective  Laws  413 

If  the  second  of  the  above  reasons  is  accepted  as  a  justifica-  -^^en 
tion  for  laws  protecting  women  wage-earners,  there  seems  no 
reason  why  such  laws  should  not  be  extended  to  men  in  those 
trades  in  which  they  do  not  bargain  on  equal  terms  with  their 
empIo}ers.  This  view  appears  to  be  gaining  ground  and 
has,  as  we  shall  see,  already  found  expression  in  connection 
with  legislation  affecting  the  so-called  sweating  trades. 

Another  reason  for  protective  labour  laws,  than  inequality  Dangerous 
between  employers  and  employees,  is  the  ignorance  and  care- 
lessness of  the  latter.  Ignorance  often  leads  workmen  to 
assume  risk?  and  undertake  tasks  on  terms  that  they  would  not 
with  full  knowledge  accept.  Once  committed,  the  inertia  that 
is  characteristic  of  all  men  prevents  them  from  repudiating 
their  bargains.  Carelessness  is  an  even  more  common  cause  of 
contracts  of  employment  that  are  socially  undesirable.  This  is 
conspicuously  the  case  in  dangerous  trades.  The  natural 
optimism  of  workmen  leads  them  to  feel  that  whatever  the  dan- 
gers may  be,  they  themselves  will  escape.  The  result  is  that 
they  accept  risks,  even  certainties,  of  disease  and  death  on 
terms  that  compensate  neither  them,  their  families,  nor  society 
at  large  for  the  waste  of  life  which  such  employments  entail. 
It  is  on  this  account  that  special  legislation  in  reference  to  the 
conditions  of  employment  in  dangerous  trades  has  been  found 
necessary,  and  on  it  also  are  based  the  laws  in  reference  to  em- 
ployers' liability  for  injuries  to  their  employees  and  industrial 
insurance  that  are  discussed  in  Section  244. 

In  drafting  protective  labour  laws,  it  is  hardly  necessary  to  Purpose  of 
add,  the  end  to  be  held  constantly  in  view  should  be  the  good  £a'\vs*^^^^^ 
of  the  whole  community.     This  should  be  conceived  in  no  nar- 
row spirit,  but  should  take  full  account  of  the  effect  of  restric- 
tions on  slowly  evolving  society.     A  temporary  benefit  should  • 
not  be  preferred  if  its  result  is  likely  to  be  the  conservation  or 
encouragement  of  an  undesirable  type  of  person,  nor  should 
temporary  inconvenience  or  loss  be  shunned  if  its  long-run  re- 
sult is  likely  to  be  advantageous. 

§  235.  The  history  of  labour  legislation  in  Great  Britain  is  History 
instructive  on  many  accounts.     No  country  has  gone  further  in  j^e\r^hai'on 
its  adoption  of  the  laissc::-faire  policy  as  regards  other  indus-  in  f^rcat 
trial  relations  and  in  none  have  the  successive  steps  in  the  do- 


414       The  Legal  Regulation  of  Labour 

velopment  of  the  comprehensive  law  which  now  protects  not 
only  children  and  women,  but  adult  men,  been  so  vigorously 
opposed  or  finally  passed  on  the  basis  of  such  careful  study  of 
actual  conditions. 

1802-1831  The  first  five  acts  to  be  passed  from  1802  to  1831  applied 

only  to  cotton  mills  and  were  so  moderate  in  their  requirements 
as  to  present  a  striking  contrast  to  the  laws  now  m  force.  The 
Act  of  1802  sought  to  correct  the  frightful  abuses  to  which  the 
apprenticeship  system  had  given  rise,  by  limiting  the  work  of 
apprentices  to  twelve  hours  a  day  and  protecting  them  in  other 
ways.  The  Act  of  1819  applied  to  all  children  employed  in 
cotton  mills.  It  prohibited  the  employment  of  children  under 
nine  years  of  age  and  limited  the  work  of  those  under  sixteen 
to  twelve  hours  a  day  or  seventy-two  a  week,  no  part  of  which 
should  be  performed  at  night.  Finally  the  act  of  1831,  while 
re-enacting  earlier  restrictions,  prohibited  altogether  night 
M^ork  for  minors  and  limited  the  hours  of  those  under  eighteen 
to  twelve  a  day  and  nine  on  Saturday,  or  sixty-nine  hours  a 
week. 

Act  of  1833  After  1831  the  agitation  for  labour  laws  assumed  a  more 
radical  tone  and  each  new  act  was  made  the  basis  for  still  fur- 
ther demands.  Successive  royal  commissions  were  appointed 
to  investigate  the  conditions  of  employment  in  different  trades 
and  their  reports  supplied  abundant  material  for  the  advocates 
of  protective  laws.  The  Act  of  1833  applied  to  all  textile  mills 
and  extended  to  them  (except  silk  mills)  the  restrictions  of  the 
Actofi83i.  It  added  the  important  distinction  between  "  chil- 
dren "  (from  nine  to  thirteen  years  of  age)  and  "  young  per- 
sons "  (from  thirteen  to  eighteen),  and  limited  the  labour  of 
the  former  to  forty-eight  hours  a  week.  It  also  created  four 
factory  inspectors  to  enforce  the  law  and  required  age  certifi- 
cates to  be  made  out  by  physicians  rather  than  by  parents  as 
theretofore. 

Mining  ^  The  next  important  advance  was  in  connection  with  the  min- 

ing-industry, conditions  in  which  had  been  shown  to  be  particu- 
larly distressing  by  the  Report  of  the  Royal  Commission  ap- 
pointed in  1840.  "  A  very  large  number  of  labourers  employed 
were  under  thirteen,  since  children,  on  account  of  their  diminu- 
tive size,  were  best  fitted  to  draw  the  loads  through  the  low 


Act  of  1842 


The  Present  Law  415 

galleries.  Girls  and  adult  females  performed  the  same  work 
as  the  men.  .  .  Very  often  children  of  both  sexes  worked  to- 
gether in  a  half-naked  state.  .  .  The  workmen  were  in  most 
cases  crippled  and  simultaneously  subject  to  an  abnormal  de- 
velopment of  certain  muscles  and  to  numerous  diseases,  espe- 
cially of  the  respiratory  organs.  .  .  Immorality  and  ignorance 
prevailed  to  a  most  frightful  extent."  *  The  ^Mining  Act  of 
1842  attempted  to  correct  these  evils  by  prohibiting  altogether 
underground  work  by  women,  or  by  boys  under  ten  years  of 
age,  and  by  imposing  other  restrictions. 

The  Factory  Act  of  1833  had  proved  unsatisfactory  from  the  I'^e 
administrative  point  of  view  because  it  failed  to  specify  with  l^^ 
sufficient  exactness  the  hours  within  which  work  might  be  per- 
formed by  the  protected  classes.  This  defect  was  corrected  by 
the  act  of  1844,  which  provided  that  children  might  work  six 
and  one-half  hours  a  day  either  in  the  morning  or  in  the  after- 
noon, or  ten  hours  on  alternate  days,  and  that  young  persons 
and  women  might  work  twelve  hours  a  day  (nine  on  Satur- 
day), but  that  these  hours  plus  one  hour  and  a  half  for  meals 
must  be  counted  continuously  from  the  time  work  was  begun 
in  the  morning.  The  addition  of  adult  women  to  the  protected 
classes  appears  to  have  attracted  little  attention  at  the  time,  al- 
though its  effect  has  been  to  limit  the  work  of  adult  men  em- 
ployed in  the  textile  industries  to  the  same  hours,  since  it  docs 
not  usually  pay  to  keep  the  machinery  in  motion  for  their  ex- 
clusive benefit.f  Since  1844  efforts  have  been  directed  towards 
limiting  still  further  the  hours  of  the  protected  classes  and  ex- 
tending similar  regulations  to  all  industries.  By  successive 
acts  the  minimum  age  at  which  children  may  be  employed  in 
factories  or  workshops  has  been  raised  to  ten,  eleven,  and  finally 
twelve  (1874.  1 89 1,  1895)  ;  the  employment  of  children  under 
fourteen  has  been  more  rigidly  restricted,  with  a  view  to 
insuring  their  continuance  in  school :  the  hours  of  young  per- 
sons and  women  have  been  reduced  until  they  are  now  fifty-five 
a  week  in  textile  and  sixty  in  non-textile  factories;  the  latter 

*  Von  Plener,  En_<^/is/i  Factory  Legislaiwn,  pp.  23-25. 

f  According  to  the  report  of  the  factory  inspectors,  the  men  em- 
ployed in  the  textile  industries  in  1847  numbered  only  i Si, oSo  out  of 
a  total  of  544,876  hands. 


Constitu- 
tionality 
of  Labour 
Laws  in  the 
United 
States 


Conflicting 
Decisions 
of  Ameri- 
can Courts 


416        The  Legal  Regulation  of  Labour 

and  workshops  have  been  subjected  to  regulations  similar  to 
those  applying  to  textile  factories ;  dangerous  trades  have  been 
regulated ;  and  the  machinery  for  enforcing  all  labour  laws  has 
been  perfected  until  violations  are  conspicuous  by  their  rarity. 
The  Factory  and  Workshop  Act  passed  August  17,  1901, 
codifies  all  of  this  legislation  into  a  statute  of  163  sections  and 
covering  over  one  hundred  finely  printed  octavo  pages,  and  it 
is  to  this  that  reference  is  made  in  future  sections  when  the 
present  law  of  Great  Britain  is  mentioned. 

§  236.  The  development  of  the  system  of  labour  laws  just 
described  was  untroubled  by  any  question  of  constitutional  au- 
thority, since  under  the  English  system  Parliament  is  supreme. 
In  the  United  States  a  constant  obstacle  to  the  legal  regula- 
tion of  labour  has  been  the  written  constitutions.  As  inter- 
preted by  the  courts  both  the  State  and  the  Federal  constitu- 
tions guarantee  freedom  of  contract  and  immunity  from  special 
or  class  legislation.  These  guarantees  are  not  absolute.  All 
authorities  agree  that  they  may  be  set  aside  when  necessary  in 
order  to  protect  individuals  in  their  lives,  their  health,  their 
morals,  or  their  property,  that  is,  in  the  exercise  of  the  state's 
"  police  power ;  ''  but  tniless  a  labour  law  can  be  shown  to  have 
this  for  its  purpose  and  to  be  reasonably  calculated  to  achieve 
its  object,  it  will  be  declared  unconstitutional. 

A  study  of  American  decisions  in  cases  involving  labour  laws 
is  well  calculated  to  confuse  even  the  legal  mind.  There  is 
scarcely  a  regulation,  from  a  simple  restriction  on  the  age  at 
which  children  ma}^  be  employed  to  the  provision  that  men  may 
work  only  eight  hours  a  day  in  specified  industries,  that  has  not 
been  declared  imconstitutional  in  certain  sections  of  the  coun- 
try, only  to  be  upheld  as  a  legitimate  exercise  of  the  police 
power  in  others.  The  Supreme  Court  of  Pennsylvania  char- 
acterised an  act  prohibiting  the  payment  of  wages  in  orders  on 
a  company  store  as  "  utterly  unconstitutional  and  void  "  and 
went  on  to  say  that  it  represented  "  an  insulting  attempt  to 
put  the  labourer  under  a  legislative  tutelage,  which  is  not  only 
degrading  to  his  manhood,  but  subversive  of  his  rights  as  a 
citizen  of  the  United  States,"  and  yet  such  measures  have  been 
upheld  in  most  of  the  other  States  as  proper  and  beneficent  re- 
strictions.    The  Supreme  Court  of  Illinois  declared  an  eight- 


Decisions  of  American  Courts  417 

hour  law  applying  to  women  employed  in  the  sweating  trades 
unconstitutional  on  the  ground  that  it  involved  class  legisla- 
tion, and  yet  the  courts  in  Massachusetts,  New  York,  and  even 
Pennsylvania  have  affirmed  the  right  of  the  legislature  to  single 
out  women  and  the  sweating  trades  for  restrictions  which  do 
not  apply  generally  throughout  the  community.  Finally  the 
Supreme  Court  of  Colorado  declared  unconstitutional  an  eight- 
hour  law  applying  to  men  employed  in  the  mining  and  smelt- 
ing industries  on  the  ground  that  if  such  a  law  was  calculated 
to  protect  the  health  or  morals  of  anybody,  it  could  only  be  of 
the  very  men  whose  work  was  restricted,  and  that  the  legis- 
lature had  no  right  to  restrict  freedom  of  contract  for  the 
benefit  only  of  the  persons  whose  liberty  was  thus  limited ;  and 
yet  the  Supreme.  Court  of  the  United  States  had  declared  in 
upholding  the  constitutionality  of  an  identical  statute  previously 
passed  by  the  State  of  Utah,  that  the  legislature  had  the  right 
to  protect  an  individual  even  "  against  himself,"  on  the  ground 
that  "  the  state  still  retains  an  interest  in  his  welfare  no  matter 
how  reckless  he  may  be,"  and  that  when  "  the  individual  health, 
safety,  and  welfare  are  sacrificed  or  neglected  the  state  must 
suffer."  In  all  of  these  cases,  except  the  last,  the  difference  of 
opinion  concerns  not  the  principle  involved,  but  its  application, 
and  it  requires  no  great  insight  to  perceive  that  the  really  de- 
termining consideration  was  whether  the  particular  measure 
was  deemed  wise  and  beneficent  or  the  reverse.  If  expedient, 
a  restriction  on  labour  must  in  the  nature  of  the  case  be  calcu- 
lated to  protect  the  health  or  morals,  at  least  of  the  protected 
classes.  If  inexpedient,  it  becomes  thereby  an  illegitimate 
exercise  of  the  police  power  for  the  simple  reason  that  it  is  not 
calculated  to  secure,  in  a  large  sense,  the  ends  for  the  realisa- 
tion of  which  that  power  exists.  It  follows  that  the  constitu- 
tional obstacle  to  labour  legislation  in  the  United  States  may 
be  expected  to  give  way  as  soon  as  public  opinion,  and  particu- 
larly judicial  opinion,  has  been  educated  to  the  point  where  it 
approves  of  such  legislation.  As  laws  that  may  be  passed  in 
this  field  are  not  likely  to  be  enforced  unless  public  opinion  is 
behind  them,  this  obstacle  ought  not  to  retard  unduly  the  enact- 
ment of  such  restrictions  as  industrial  conditions  call  for.  In 
fact,  up  to  the  present  time,  there  have  been  few  occasions  on 


41 8        The  Legal  Regulation  of  Labour 

which  labour  laws  which  have  been  really  demanded  by  public 
opinion  have  been  declared  unconstitutional. 
Decision  §  237.  When  a  labour  law  is  declared  unconstitutional  by  the 

Eight-hour  highest  tribunal  in  a  State  there  is  no  appeal,  as  it  is  the  supreme 
Law  Case  interpreter  of  the  State  constitution.  When  declared  consti- 
tutional, however,  it  must  still,  if  an  appeal  be  taken,  run  the 
gauntlet  of  the  United  States  Supreme  Court  since  the  rights 
which  it  infringes  are  protected  also  by  the  Federal  Constitu- 
tion. Among  the  decisions  which  have  been  rendered  by  the 
latter  tribunal  none  is  more  significant  than  that  handed  down 
on  February  28,  1898,  in  the  Utah  Eight-hour  Law  Case, 
already  referred  to.  The  law  under  consideration  limited  the 
work  of  all  employees  engaged  in  the  mining  and  smelting  in- 
dustries to  eight  hours  a  day,  and  allowed  exceptions  only  when 
life  or  property  should  be  in  danger.  It  was  thus  an  extreme 
type  of  protective  legislation,  going  far  beyond  anything  pre- 
viously tried  in  Great  Britain.  Nevertheless  the  Supreme 
Court  declared  it  a  legitimate  exercise  of  the  police  power  and 
therefore  constitutional.  Because  of  its  authoritative  character 
the  grounds  on  which  the  decision  in  this  case  was  based  merit 
brief  consideration.  After  explaining  the  nature  of  the  police 
power  and  citing  decisions  showing  the  field  within  which  it 
may  be  exercised,  the  court  concludes  *  that,  "  while  it  cannot 
be  put  forward  as  an  excuse  for  oppressive  or  unjust  legisla- 
tion, it  may  be  lawfully  resorted  to  for  the  purpose  of  preserv- 
ing the  public  health,  safety,  or  morals,  or  the  abatement  of 
public  nuisances,  and  a  large  discretion  is  necessarily  vested  in 
the  legislature,  to  detemiine,  not  only  what  the  interests  of  the 
public  require,  but  what  measures  are  necessary  for  the  protec- 
tion of  such  interests."  It  then  reviews  sanitary  and  safety 
regulations  applying  to  the  mining  and  smelting  industries, 
which  had  been  held  to  be  constitutional,  to  emphasise  the  fact 
that  these  had  been  recognised  as  dangerous  trades.  Although 
such  regulations  were  designed  to  protect  the  lives  of  employees 
in  these  industries,  the  court  argues  that  it  would  be  equally 
competent  for  the  legislature  to  enact  regulations  for  the  pro- 
tection of  their  health,  and  cites  quarantine,  and  child  and 
women  labour  laws  as  cases  in  point.  Coming,  then,  to  the  law 
*  18  Supreme  Court  Reporter,  p.  383  et  seq. 


Value  of  this  Precedent  419 

in  question,  the  court  quotes  with  approval  the  reasoning  of  the 
Supreme  Court  of  Utah.  Employment  in  the  specified  indus- 
tries must  be  conceded  to  be  unhealthful  if  too  long  con- 
tinued. "  Twelve  hours  per  day  would  be  less  injurious  than 
fourteen,  ten  than  twelve,  and  eight  than  ten.  The  legislature 
has  named  eight.  Such  a  period  was  deemed  reasonable."  The 
law  is,  consequently,  a  health  regulation  calculated  to  accom- 
plish the  object  aimed  at.  Any  mere  doubt  on  the  point  should 
be  resolved  in  favour  of  the  legislature,  which  must  be  assumed 
to  have  passed  the  law  in  good  faith  and  after  careful  delibera- 
tion. The  court  then  turns  to  more  general  considerations.  It 
affirms  the  propriety  of  labour  laws  on  the  general  ground  that 
employers  and  employees  are  unequal  in  bargaining  power, 
"  The  former  naturally  desire  to  obtain  as  much  labour  as  pos- 
sible from  their  employees,  while  the  latter  are  often  induced  by 
fear  of  discharge  to  conform  to  regulations  which  their  judg- 
ment, fairly  exercised,  would  pronounce  to  be  detrimental  to 
their  health  and  strength.  In  other  words,  the  proprietors  lay 
down  the  rules,  and  the  labourers  are  practically  constrained  to 
obey  them.  In  such  cases  self-interest  is  often  an  unsafe  guard, 
and  the  legislature  may  properly  interpose  its  authority." 
Finally,  it  affirms  the  principle  already  quoted,  that  in  the  exer- 
cise of  its  police  power  the  legislature  has  the  right  to  protect 
a  man  even  against  himself. 

The  reasoning  in  the  above  decision  is  admirable  whether  Value 
judged  as  law  or  as  economics,  and  its  general  acceptance  by  p  ^  , 
State  courts  in  the  United  States  may  be  counted  upon  to  re- 
lieve all  desirable  labour  restrictions  from  the  ban  of  uncon- 
stitutionality. Especially  worthy  of  attention  is  its  insistence 
that  the  presumption  in  labour  cases  should  be  in  favour  of 
constitutionality,  on  the  ground  that  the  legislature  is  in  closer 
contact  with  the  actual  conditions  of  industrial  life  than  the 
courts  and  l)ctter  able  to  judge  when  the  public  health  is  en- 
dangered and  by  what  measures  it  may  be  protected.  If  this 
view  were  always  taken  by  the  courts,  scope  would  be  afforded 
for  legislative  experiments  in  the  field  of  labour  regulation 
which  might  be  of  value  not  only  to  the  United  States,  but  to 
the  world. 

§  238.  In  the  United  States,  as  in  Great  Britain,  the  develop- 


Child 
Labour 
Laws  in 
the  United 
States 


Purpose  of 
Such  Laws 


420        The  Legal  Regulation  of  Labour 

ment  of  child-labour  laws  has  been  closely  connected  with  the 
growth  of  public  schools  to  serve  as  substitutes  for  the  factory 
and  workshop.  Those  States  which  have  given  most  attention 
to  questions  of  education,  like  Massachusetts  and  New  York, 
have  adopted  the  most  rigid  child-labour  laws.  On  the  other 
hand,  the  States  whose  public  educational  systems  are  back- 
ward, as  are  those  of  the  Southern  States,  either  have  lax  child- 
labour  laws  or  are  entirely  without  them.  In  general,  the  child- 
labour  regulations  of  the  United  States  are  more  exacting  than 
those  of  Great  Britain,  but  less  rigidly  enforced.  Thus  in 
Massachusetts  and  New  York  no  child  under  fourteen  (instead 
of  twelve  as  in  Great  Britain)  may  be  employed  in  any  factory, 
workshop,  or  mercantile  establishment,  and  children  between 
the  ages  of  eight  and  fourteen  must  attend  school  during  the 
entire  school  year ;  but  evasions,  especially  in  the  latter  State, 
have  been  common.  At  the  other  extreme  are  some  of  the 
Southern  States,  which  impose  such  moderate  restrictions  as 
that  children  under  twelve  shall  not  be  employed  at  all,  and 
those  between  twelve  and  fourteen  shall  work  not  over  ten 
hours  a  day  (Virginia),  or  leave  child-labour  quite  un- 
regulated. 

It  needs  no  argument  at  this  stage  of  the  discussion  to  prove 
that  the  interests  of  society  require  that  provision  be  m.ade  for 
the  careful  training,  at  public  expense,  of  every  boy  and  girl 
up  to  the  age  of  sixteen  if  not  of  eighteen.*  Merely  as  a  com- 
mercial investment,  public  money  spent  on  such  training  is  sure 
to  yield  a  princely  return  in  the  superior  industrial  efficiency  of 
the  population.  In  order  to  insure  that  full  advantage  will  be 
taken  of  the  public  schools  it  is  necessary  to  restrict  the  em- 
ployment of  children  more  rigidly  than  regard  merely  for  their 
physical,  development  would  require.  On  this  ground  the 
prohibition  of  the  employment  of  children  under  fourteen 
should  be  looked  upon  as  only  a  beiginning.  By  successive 
steps  the  minimum  age  of  employment  should  be  raised  at  least 
to  sixteen,  and  school  facilities  should  be  increased  and  im- 
proved so  that  all  children  up  to  that  age  can  be  given  the  best 
educational  advantages. 

§  239.  As  regards  the  labour  of  women,  restrictions  in  the 
United  States  are,  on  the  whole,  less  rigid  than  in  Great  Britain. 
*C7.Chapter  VIL,  Section  68,  and  Chapter  XIII.,  Sections  138  and  139. 


Laws  Regulating  Labour  of  Women     421 

Thus  in  Massachusetts  and  New  York  the  maximum  working  Laws 
periods  for  women  employed  in  factories  are  fifty-eight  and  L^bom'^'f^ 
sixty  hours  a  week,  respectively,  as  compared  with  fifty-five  in  Women 
textile  and  sixty  in  non-textile  factories  in  Great  Britain.  Sev- 
eral of  the  States,  moreover,  impose  no  restrictions  whatever  on 
the  employment  of  women,  and  in  at  least  one  (Illinois)  such 
special  restrictions  have  been  declared  unconstitutional.  The 
opposition  to  such  regulations,  so  far  as  it  is  disinterested,  is 
based  on  the  fear  that  they  may  serve  to  undermine  the  spirit 
of  independence  of  the  protected  persons.  Experience  seems 
to  indicate  that  they  have,  in  fact,  a  directly  contrary  effect. 
By  preventing  employers  from  prescribing  working  hours  that 
would  be  detrimental  to  the  health  of  their  women  employees, 
they  permit  the  latter  to  retain  that  state  of  mind  and  body  that 
is  indispensable  to  any  real  independence  of  thought  or  action. 
So  long  as  the  restrictions  apply  generally  to  all  women  and  are 
neither  extreme  nor  unreasonable,  there  is  nothing  in  them  to 
lessen  the  self-respect  of  the  protected  classes.  They  are  ac- 
cepted like  other  conditions  over  which  the  parties  affected  have 
no  control,  without  lessening  in  the  least  their  determination  in  * 

dealing  with  those  other  conditions  which  they  may  hope  to 
modify.  The  reasons  for  regulating  the  employment  of  women 
apply  with  special  force  to  those  who  are  married.  In  Great 
Britain  the  law  prohibits  the  employment  of  such  women  within 
four  weeks  after  childbirth,  and  all  medical  authorities  agree 
as  to  the  importance  of  such  a  restriction,  where  experience 
shows  it  to  be  necessary.  Many  thoughtful  persons  think  that 
the  law  should  go  even  further  and  either  prohibit  altogether 
the  employment  of  married  women  in  shops  or  factories  or 
limit  it  to  married  women  without  infant  children.  Desirable 
as  such  a  limitation  would  be  in  most  cases,  the  impossibility  of 
enforcement  is  a  decisive  objection  to  it.  It  seems  wiser  to  rely 
upon  the  education  of  married  women  themselves  and  their 
husbands,  and  upon  the  influence  of  public  opinion,  to  restrict 
the  employment  of  married  women  to  cases  in  which  it  in- 
volves no  sacrifice  of  the  interests  of  children.  Up  to  the 
present  time,  in  the  United  States,  at  any  rate,  the  emplovment 
of  married  women  has  been  too  unusual  to  call  for  leirislative 
interference. 


The 

Agitation 

for  a 

Universal 

Legal 

Eiglit-hour 

Day 


Objections 
to  Plan 


422        The  Legal  Regulation  of  Labour 

§  240.  Restrictions  in  reference  to  hours  of  employment,  im- 
posed in  some  instances  by  law  and  in  some  by  the  rules  of 
trade  unions,  have  advanced  so  far  in  Great  Britain  and  the 
United  States  that  there  is  now  widespread  agitation  for  a 
legal  eight-hour  day,  to  apply  to  all  employees  in  all  trades. 
This  period  of  employment  has  already  become  general  for 
Government  employees  in  both  countries.  It  is  common  in  the 
building  and  other  skilled  trades.  In  other  employments,  nine, 
ten,  and  even  twelve-hour  periods  are  still  the  rule,  but  many 
people  believe  that  the  time  is  ripe  for  the  change  to  eight 
hours. 

Much  as  may  be  said  in  support  of  a  further  shortening  of 
the  working  day  in  many  employments,  the  proposal  that  a 
uniform  period  be  made  to  apply  to  all  alike  seems  unsupported 
either  by  reason  or  experience.  Different  occupations  make  dif- 
ferent demands  on  the  strength  and  nervous  energy  of  work- 
men, and  a  workday  that  would  be  moderate  for  one  kind  of 
employment  would  be  excessive  for  another.  These  differences 
have  been  considered  in  the  development  of  protective  labour 
laws  in  the  distinctions  made  in  all  countries  between  manufac- 
turing and  mercantile  pursuits,  and  in  Great  Britain  between 
textile  and  non-textile  factories.  To  disregard  them  by  estab- 
lishing a  uniform  eight-hour  day  would  be  to  take  a  backward 
step.  It  is  doubtless  true,  as  urged  by  advocates  of  the  eight- 
hour  day,  that  its  adoption  for  certain  trades  would  involve  no 
permanent  lessening  of  the  productiveness  of  a  day's  labour. 
The  shorter  work  period  would  insure  more  active  and  intense 
exertion  on  the  part  of  workers  than  they  can  maintain  when 
employed  for  nine  or  ten  hours.  On  the  other  hand,  it  is 
equally  certain  that  in  other  trades  reducing  hours  to  eight  a 
day  would  reduce  the  output  proportionately.  The  effect  of 
this  in  the  long  run  would  be  to  reduce  wages  correspondingly, 
and  it  is  highly  probable  that  such  a  reduction  in  wages  would 
in  many  cases  inflict  more  injury  than  the  shorter  working 
day  could  compensate.  It  would  seem  better  for  each  country 
to  proceed  piecemeal  towards  the  realisation  of  shorter  work- 
ing hours  for  all  employees  as  in  the  past,  rather  than  to 
adopt  all  at  once  a  regulation  which  could  not  but  be  disad- 
vantageous to  many  and  might  prove  unsatisfactory  to  all. 


The  Sweating  Evil  423 

The  above  objections  to  an  eight-hour  law  applying  to  all  Restric- 
occupations  do  not  involve  any  criticism  of  the  policy  of  re-  Labour 
stricting  by  law  the  hours  of  men  as  well  as  of  women.  Skilled  of  Men 
workmen,  especially  when  organised  in  trade  unions,  do  not 
usually  require  such  protection.  To  unskilled  workmen,  how- 
ever, it  may  be  the  indispensable  means  to  the  attainment  of  a 
higher  standard  of  living  and  of  industrial  efficiency.  The 
argument  that  it  serves  to  undermine  the  spirit  of  independ- 
ence has  already  been  examined  and  rejected.  Those  who  ad- 
vance it  fail  to  consider  that  deadening  and  monotonous  toil 
too  long  continued  is  much  more  inimical  to  the  spirit  of  in- 
dependence than  any  amount  of  regulation.  They  also  ignore 
the  fact  that  restrictive  labour  laws  are  usually  passed  out  of 
deference  to  the  wishes  of  those  they  are  designed  to  protect, 
and  that  they  are  often  the  only  means  by  which  a  determined 
majority  may  prevent  an  ignorant  or  selfish  minority  from 
blocking  progress.  Here,  as  elsewhere,  it  is  often  desirable  for 
the  state  to  interfere  to  establish  the  plane  of  competition,  and 
experience  afifords  no  ground  for  the  view  that  self-reliance 
and  the  spirit  of  self-help  are  lessened  by  an  exercise  of  legis- 
lative authority  to  advance  this  plane  to  a  higher  level. 

§  241.  Industrial  progress,  like  progress  in  other  fields,  has  The 
its  dark  as  well  as  its  bright  side.  The  dark  side  in  connection  1"^^^'"^ 
with  conditions  of  employment  is  presented  in  the  so-called 
"  sweating  trades."  These  are  carried  on  in  large  cities  every- 
where and  have  even  spread  to  country  districts.  A  descrip- 
tion of  the  system  as  it  prevails  in  connection  with  the 
clothing  industry  will  reveal  its  salient  features.  As  this  indus- 
try is  now  carried  on,  it  is  divided  into  various  stages.  Cutting 
the  cloth  from  which  garments  are  to  be  made  is  performed 
under  the  direct  superintendence  of  the  manufacturer.  The 
pieces  are  then  tied  in  bundles  and  turned  over  to  contractors 
who  agree  to  have  them  made  up  at  so  much  a  garment.  The 
latter  (fonvey  them  to  their  shops,  the  "  sweat-shops  "  proper, 
and  cither  have  the  work  done  there  under  their  own  super- 
vision by  poorly  paid  and  overworked  men,  women,  and  chil- 
dren, or  else  subcontract  them  to  men  and  women  who  make 
them  up  in  their  own  homes.  The  condition  of  home-workers 
is  often  more  wretched  than  that  of  the  sweat-shop  employees 


Conditions 
in  the 
Clothing 
Trades 


424       The  Legal  Regulation  of  Labour 

with  whom  they  compete,  since  they  are  forced  to  convert  their 
homes  into  workshops,  to  the  sacrifice  of  all  of  the  privacy 
and  much  of  the  sweetness  of  family  life. 

The  evils  that  result  from  the  sweating  system  are  that  wages 
are  low  and  unequal  for  the  same  kinds  of  work,  employment 
IS  irregular,  hours  are  long,  the  premises  on  which  the  work  is 
done  are  insanitary,  and,  finally,  there  is  little  chance  for  ad- 
vancement in  the  trade  for  the  rank  and  file  of  workers.  The 
system  owes  its  existence  to  a  number  of  causes.  In  the  first 
place,  the  work  to  be  done  is  of  the  simplest  character,  and  any 
person  of  ordinary  intelligence  can  learn  to  do  it,  after  a 
fashion,  after  a  few  hours'  instruction.  This  throws  it  open 
to  the  competition  of  men,  women,  and  children  of  all  classes 
and  conditions.  Hom.e  work  is  taken  by  the  well-to-do  wives  of 
labourers  as  a  means  of  securing  pin-money,  and  also  by  poor 
widows  struggling  to  keep  their  children  from  starvation.  Men 
too  old  for  any  other  kind  of  work  sew  side  by  side  with  young 
children  who  ought  to  be  in  school.  The  consequence  of  this 
competition  is  that  the  labour  market  is  always  overstocked  and 
wages  correspondingly  depressed.  In  the  cities  of  the  United 
States  competition  for  employment  in  the  sweating  trades  is 
made  especially  severe  by  the  steady  influx  of  immigrants, 
many  of  whom  find  this  species  of  work  the  easiest  to  take  up, 
and  do  not  learn,  until  after  they  have  been  in  the  country  some 
time,  how  much  worse  off  they  are  than  American  workmen  in 
other  trades.  Another  cause  is  the  ignorance  and  comparative 
isolation  of  the  workers.  This  applies  especially  to  those  who 
work  at  home.  They  go  to  the  contractor,  or  "  sweater,"  singly 
or  in  pairs,  and  have  to  rely  largely  on  his  fairness  in  deter- 
mining what  they  ought  to  get  for  their  work.  In  American 
cities  the  contractors  are  usually  Jews  and  the  home-workers 
Italians,  so  race  and  religious  antipathy  play  their  part  in  con- 
nection with  the  sharp  practices  of  which  the  former  are  guilty. 
The  success  of  the  sweater  depends  upon  the  shrewdness  and 
relentlessness  with  which  he  takes  advantage  of  his  position. 
He  makes  a  special  bargain  with  each  outworker  and  gets  the 
best  terms  he  can.  irrespective  of  what  he  is  paying  others  for 
the  same  work.  The  different  piece  prices  to  which  this  may 
give  rise  was  illustrated  in  Philadelphia  during  the  Spanish- 


Australasian  Experiments  425 

American  War,  when  army  trousers,  all  of  which  had  to  be 
passed  upon  by  the  same  Governm.ent  inspectors,  were  being 
made  up  in  different  sIiojjs  for  from  thirty-five  to  seventy-five 
cents  a  garment.  Still  a  third  cause  of  the  system  is  the  irreg- 
ularity of  the  demand  for  the  goods  produced.  At  certain 
seasons  work  is  active  and  contractors  who  have  taken 
"  hurry-up  orders  "  drive  their  employees  to  the  extreme  limit 
of  human  endurance.  At  other  times  work  is  scarce  and  the 
competition  for  it  is  so  severe  that  earnings  are  reduced  to  a 
starvation  level.  This  irregularity  is  perhaps  the  worst  aspect 
of  the  sweating  system,  since  it  is  destructive  alike  of  health 
and  character. 

§  242.  It  is  easier  to  perceive  the  causes  of  the  sweating  Remedies 
system  than  to  devise  remedies,  and  yet  much  has  already  been  Q^g^^  ^ 
done  to  improve  conditions.    In  American  cities  the  plan  is  being  Britain 
tried  of  requiring  premises  in  which  the  sweating  trades  are  united 
carried  on  to  be  licensed  for  the  purpose,  and  of  making  the  States 
issue  and  continuance  of  licenses  contingent  on  compliance  with 
sanitary  and  labour  regulations.   The  factory  inspectors  are  re- 
quired to  inspect  the  shops  and  homes  in  which  such  work  is 
performed  and  to  hold  contractors  responsible  for  work  done  in 
unlicensed  premises.     In  Great  Britain  a  further  step  has  been 
taken  by  making  the  manufacturers  for  whom  the  work  is  being 
done  responsible  for  the  sanitary  condition  of  the  premises  in 
which  it  is  performed,  after  notification  by  the  inspector  that 
these  premises  are  unsatisfactory.     Either  system  requires  for 
its  successful  operation  a  larger  force  of  factory  inspectors  than 
has  yet  been  provided.     In  New  York  City,  where  there  were 
on  March  31,  1903,  over  24,000  licensed  work-places,  the  stafif 
of  inspectors  permits  on  the  average  but  two  inspections  a  year. 
Obviously,  under  such  circumstances  many  violations  of  the  law 
must  escape  detection.    Even  if  rigidly  enforced,  the  measures 
thus  far  taken  in  Great  Britain  and  the  United  States  would 
remedy  only  one  phase  of  the  sweating  evil,  that  is,  the  sanitary 
conditions  under  which  work  is  carried  on.     The  long  hours 
and  low  wages,  which  are  its  worst  features,  remain  unafifected. 

The  most  drastic  remedy  yet  applied  to  the  sweating  evil  was  Austral- 
adopted  bv  the  state  of  Victoria.  Australia,  in   1806.  through  ^^lan 
'  .'  ^   •  r^      Experi- 

the  creation  of  wage  boards  consisting  of  from   four  to  six  ments 


426        The  Legal  Regulation  of  Labour 

members  to  be  chosen  one-half  by  employers  and  one- 
half  by  employees  and  empowered  to  fix  not  only  wages, 
but  hours  of  labour  and  the  proportion  of  apprentices  to 
be  employed  in  the  designated  industries.  The  decisions 
arrived  at  by  these  boards  are  binding  on  the  whole  trade, 
and  can  be  reversed  only  by  the  Supreme  Court.  Under 
this  system,  applying  now  to  more  than  thirty  trades, 
minimum  wages  both  for  time  and  piecework  have  been 
established  and  maximum  hours  of  employment  prescribed. 
The  available  evidence  indicates  that  conditions  in  the  sweating 
trades  have  been  materially  improved,  and  that,  incidentally, 
home  work  in  certain  trades  has  been  rendered  unprofitable. 
Of  course,  one  effect  of  the  change  has  been  to  increase  the 
number  of  persons  in  the  colony  who  are  dependent  on  public 
charity,  but  the  exclusion  of  these  incapables  from  the  ranks  of 
the  employed  is  believed  to  have  been  good  both  for  them  and 
for  the  more  efficient.  In  practice,  New  Zealand's  system  of 
compulsory  arbitration  has  secured  for  many  of  the  sweating 
trades  wages  and  hours  determined  by  judicial  decree,  and  in 
the  opinion  of  many  persons  the  results  of  this  method  are  even 
superior  to  those  of  Victoria's  wage  boards.  The  essential 
characteristics  of  both  are  that  considerations  of  social  expe- 
diency and  general  good  are  substituted  for  blind  competition 
as  the  regulators  of  conditions  of  employment,  and  standards 
are  fixed  which  insure  to  those  who  can  obtain  employment 
living  wages  and  reasonable  hours.  The  inefficient,  who  are 
"  unemployable  "  under  the  new  conditions,  become  objects  for 
public  charity,  and  experience  seems  to  prove  that  the  whole 
cost  of  their  maintenance  is  less  of  a  tax  on  the  social  organism 
than  was  their  competition  when  they  were  allowed  to  partly 
maintain  themselves. 
Conclusion  Both  New  Zealand's  and  Victoria's  plans  for  solving  the 
sweat-shop  problem  are  dismissed  as  too  radical  by  English  and 
American  students  of  the  evil.  The  further  remedies  that  are 
advocated  for  the  sweating  system  as  it  exists  in  the  United 
States  are  additional  restrictions  on  immigration,  more  rigid 
sanitary  regulations,  and  a  provision  |hat  all  garments  made  in 
tenement  houses  shall  bear  a  "  tenement-made  "  label  as  a 
warning  to  consumers  that  they  are  buying  sweaters'  products. 


The  Regulation  of  Dangerous  Trades    427 

There  is  little  question  but  that  these  changes  in  the  law, 
coupled  with  provisions  for  more  rigid  enforcement,  would 
cause  improvement,  but  it  is  doubtful  whether  the  evil  can  be 
corrected  by  such  simple  means.  It  is  too  soon  to  pronounce  the 
Australian  plan  of  establishing  minimum  wage  rates  by  public 
boards  or  tribunals  a  success,  but  in  the  opinion  of  many  per- 
sons only  some  such  remedy,  which  goes  to  the  root  of  the  diffi- 
culty, can  fully  correct  the  evils  of  the  system. 

§  243.  Besides  the  sweating  trades  there  are  others  which  The 
require  special  regulation  on  the  ground  that  they  are  danger-  of^Danger- 
ous  to  life  or  health.  All  manufacturing  industries  which  use  ous  Trades 
power  machinery  are  dangerous  to  a  certain  extent,  and  experi- 
ence has  taught  the  wisdom  of  requiring  that  revolving  ma- 
chinery be  fenced  and  that  the  cleaning  of  machines  while  in 
motion  be  either  prohibited  altogether  or  limited  to  adult  work- 
men. In  addition  to  these  general  regulations,  which  are  now 
included  in  the  factory  laws  of  all  progressive  countries,  expe- 
rience has  shown  the  need  of  special  restrictions  on  particular 
trades.  Occupations  connected  with  the  cleaning  of  textile 
fabrics  and  the  polishing  of  metals  are  peculiarly  unhealthful, 
as  are  also  those  concerned  with  the  manufacture  of  white  lead 
and  of  most  chemicals.  In  the  transporting  and  mining  indus- 
tries the  rate  of  mortality  is  very  great  and  can  only  be  kept 
down  by  legal  interference,  since  even  such  simple  appliances 
as  safety  lamps  and  automatic  couplers  are  introduced  but 
slowly  by  employers  unless  their  use  is  made  obligatory. 

Great  Britain  has  gone  much  further  than  any  of  the  States  System  in 
of  the  United  States  towards  the  adequate  regulation  of  danger-  ^^f^^j^ 
ous  trades.  The  present  system  of  that  country  is  to  vest  large 
discretionary  powers  in  reference  to  the  control  of  dangerous 
trades  in  the  Home  Secretary.  Medical  practitioners  are  re- 
quired to  report  illness  which  they  believe  to  be  due  to  unhealth- 
ful conditions  of  employment  to  the  factory  inspector,  and  the 
latter,  as  soon  as  he  becomes  persuaded  that  a  trade  is  danger- 
ous and  in  need  of  special  regulation,  is  required  to  bring  the 
matter  to  the  attention  of  the  Home  Secretary.  That  officer,  if  he 
deems  it  necessary,  drafts,  with  the  assistance  of  experts,  rules 
calculated  to  meet  the  needs  of  the  situation  and  sends  copies  of 
them  to  the  employers  who  will  be  affected,  with  the  request 


Employers' 
Liability 


In  the 

United 

States 


The 

Workmen's 
Compensa- 
tion Act 
of  Great 
Britain 


428        The  Legal  Regulation  of  Labour 

that  they  file  their  objections  to  them  within  twenty-one  days. 
These  are  carefully  considered,  and  revised  rules  are  then  issued 
which  have  the  force  of  law  unless  vetoed  by  either  House  of 
Parliament.  This  system  has  the  great  merit  of  adapting  itself 
readily  to  changing  conditions,  and  might  with  advantage  be 
copied  in  its  important  features  in  the  United  States. 

§  244.  No  matter  how  rigid  the  regulations  in  reference  to 
dangerous  trades,  accidents  to  employees  resulting  in  temporary 
or  permanent  disability,  or  even  death,  are  certain  to  occur. 
Under  the  common  law  of  negligence  as  interpreted  by  English 
and  American  courts,  employers  are  liable  for  damages  when 
accidents  are  due  to  their  personal  negligence.  When,  how- 
ever, an  accident  is  due  to  unpreventable  causes  or  to  the  care- 
lessness of  the  employee  himself  or  one  of  his  fellow  em- 
ployees, no  liability  attaches  to  the  employer.  In  such  cases, 
unless  damages  can  be  collected  from  the  fellow  employee  re- 
sponsible, the  entire  loss  must  be  borne  by  the  unfortunate  vic- 
tim of  the  accident  and  his  family.  The  impolicy  and  injustice 
of  this  arrangement  have  long  been  appreciated,  and  have  led  to 
the  modification  of  the  law  of  employers'  liability  in  several 
different  directions. 

In  the  United  States  all  that  has  thus  far  been  done  has  been 
to  extend  the  employer's  liability  to  cases  in  which  accidents 
are  due  to  the  carelessness  of  his  representatives.  Thus  by  the 
Employers'  Liability  Law  adopted  by  New  York  in  1902,  the 
employer  is  responsible  for  any  accident  to  an  employee,  "  him- 
self in  the  exercise  of  due  care  and  diligence  at  the  time,"  due 
to  any  defect  in  the  condition  of  the  ways,  works,  or  machinery 
used  in  the  business  traceable  to  the  negligence  of  employees 
responsible  for  the  care  of  such  ways,  works  or  machinery,  or 
to  the  negligence  of  an  authorised  superintendent  of  the  em- 
ployer. For  accidents  due  to  the  negligence  of  employees  of 
the  same  or  of  an  inferior  grade  to  the  victim,  employers 
would  not,  under  this  act,  be  liable. 

A  similar  law  to  that  of  New  York  was  adopted  by  Great 
Britain  as  early  as  1880,  but  was  found  insufficient  as  a  remedy. 
At  the  instance  of  Mr.  Joseph  Chamberlain,  an  entirely  new 
policy,  known  as  that  of  "  workmen's  compensation,"  was  intro- 
duced through  an  act  passed  in  1897.    By  this  measure,  which 


The  British  Workmen's  Compensation  Act  429 

applies  to  all  of  the  large-scale  industries  of  the  country,  em- 
ployers are  required  to  compensate,  according  to  a  fixed  scale, 
workmen  or  their  families  for  accidents  sustained  in  connec- 
tion with  their  employments  and  resulting  in  at  least  two  weeks' 
disability,  unless  such  accidents  were  due  to  the  "  serious  and 
wilful  misconduct  of  the  workman  himself."     The  amount  of 
compensation  is  limited  to  £i  a  week  in  case  of  temporary  dis- 
ability and  £300  in  case  of  complete  disability  or  death,  and 
simple  machinery  is  provided  for  determining,  without  recourse 
to  a  court,  what  part  of  these  sums  should  be  paid  in  any  given 
case.    In  defending  this  law,  Mr.  Chamberlain  insisted  that  it 
is  not  true,  as  economists  are  fond  of  assuming,  that  wages  in 
dangerous  trades  are  enough  higher  than  those  in  other  trades 
to    compensate    workmen    for    the    risks    they    take.      Even 
if  it  were  true,  it  might  be  added,  the  difference  would  not 
compensate  the  particular  workman  who  was  injured  unless 
some  plan  of  mutual  insurance  had  been  adopted  by  which  the 
extra  compensation  was  placed  in  a  common  purse  for  the  bene- 
fit of  those  upon  whom  accidents  might  fall.    The  only  way  to 
equalise  conditions  between  safe  and  dangerous  trades,  Mr. 
Chamberlain  urged,  was  to  throw  the  burden  for  compensation 
for  accidents  upon  the  employer,  who  would,  in  turn,  throw  it 
upon  the  consumer  by  charging  somewhat  higher  prices  for  his 
goods.    "  When  you  enter  upon  a  business,"  he  said  to  employ- 
ers, "  you  must  consider  this  compensation  as  much  a  trade 
charge  as  is  now  the  provision  which  you  are  called  upon  to 
make  for  the  repair  of  machinery.    You  at  present  have  to  put 
aside  every  year  a  certain  sum  for  the  repair  of  the  inert  ma- 
chinery, which  is  a  factor  in  your  business.      Now,  the  human 
element  in  the  business  has  to  be  considered,  and  in  case  of  acci- 
dent what  reparation  you  can  make  must  be  made  as  a  charge 
upon   the   business."     The   active   opposition   which   the   act 
at  first  encountered  appears  to  have  given  place  to  passive 
acceptance  of  it  on  the  grounds  given  by  its  author.    Employers 
have  been  able  to  transfer  to  industrial  insurance  companies 
their  liability   for  compensation   under   it,   and   thus  accident 
insurance  has  come  in  Great  Britain  to  be  as  normal  an  item 
among  the  expenses  of  production  as  was  fire  insurance  before 
the  Workmen's  Compensation  Act  was  passed.     The  principal 


430       The  Legal  Regulation  of  Labour 

objections  to  the  plan  that  are  now  urged  are  that  it  does  not 
extend  to  small  employers  and  that  the  scale  of  compensation 
is  too  moderate. 
Continental  Schemes  of  industrial  insurance  similar  to  the  Workmen's 
Compensation  Act  described  are  now  well-nigh  universal  in 
European  countries.  Perhaps  the  most  elaborate  is  the  compul- 
sory insurance  system  of  Germany,  under  which  employers, 
employees,  and  the  Government  all  contribute  to  the  insurance 
fund  out  of  which  compensation  is  paid  to  workmen  in  case  of 
accident  or  illness.  The  principal  objection  to  be  urged  against 
this  plan  is  that  the  cost  of  its  administration  is  out  of  propor- 
tion to  the  benefits  v/hich  result  from  it,  but  this  may  easily  be 
exaggerated  through  failure  to  appreciate  the  saving  in  the  cost 
of  administering  public  and  private  charities  that  may  properly 
be  credited  to  such  a  comprehensive  system  of  industrial  insur- 
ance. 
Backward-  In  the  field  of  industrial  insurance,  as  in  other  fields,  Euro- 
United  pean  precedents  have  had  little  weight  in  the  United  States, 

States  in  where  there  is  still  a  strong  prejudice  in  favour  of  self-depend- 
ence in  all  such  matters.  It  is  argued  that  each  individual 
should  accept  the  risks  of  his  special  occupation  or  insure  him- 
self against  them  through  private  industrial  insurance  compa- 
nies, and  that  only  in  this  way  can  the  spirit  of  self-help  and 
self-reliance,  upon  which  our  advancing  civilisation  so  largely 
depends,  be  kept  alive.  The  obvious  reply  to  this  reasoning  is 
that  in  practice  workmen  underestimate  the  risks  to  which  they 
are  exposed  and  fail  to  insure  themselves  against  them.  The 
consequence  is  that  when  accidents  befall  them  their  families 
are  only  too  apt  to  be  left  without  adequate  provision  and  to 
become  dependents  upon  public  or  private  charity.  In  the 
opinion  of  the  author  a  plan  by  which  compensation  for  indus- 
trial accidents  is  made  one  of  the  conditions  of  the  labour  con- 
tract tends  on  the  whole  to  promote  self-reliance  and  independ- 
ence among  the  working  classes  rather  than  otherwise,  because 
it  reduces  the  amount  of  enforced  dependency.  Whether  this 
view  or  the  one  commonly  accepted  in  the  United  States  is 
correct  can  only  be  determined  by  experience,  and  for  this  rea- 
son the  results  of  the  experiments  now  in  progress  in  Europe 
should  be  watched  with  interest. 


Arguments  for  and  against  Regulation       431 

§  245.  The  subject  of  the  legal  regulation  of  labour  is  one  of  Arguments 
great  complexity.  Up  to  the  present  lime  a  priori  objections  to  against 
such  regulations  have  delayed  their  introduction,  and  only  grad-  ^wuf^t^in 
ually,  as  experience  has  demonstrated  their  usefulness,  have  of  Labour 
they  been  extended  to  situations  which  seem  to  require  them. 
In  Great  Britain  and  the  United  States  the  notion  that  the  leg- 
islative power  should  not  be  used  to  regulate  hours  and  condi- 
tions of  employment  has  been  abandoned  by  most  thoughtful 
persons,  but  the  prejudice  against  any  interference  with  wages, 
like  that  practised  in  New  Zealand  and  other  Australian  states, 
remains  nearly  as  strong  as  ever.  There  is,  of  course,  good 
ground  for  this  distinction.  Hours  and  other  conditions  of 
employment  affect  directly  the  health  and  vigour  of  the  work- 
ing classes,  wages  only  indirectly.  Moreover,  workmen  are  less 
mindful  of  their  own  interests  in  connection  with  hours  and 
sanitarv  arrangements  than  in  connection  with  wages.  Making 
all  allowance  for  these  considerations,  many  thoughtful  per- 
sons still  believe  that,  under  certain  circumstances,  notably 
those  found  in  connection  with  the  sweating  system,  the  reg- 
ulation of  wages  must  also  be  undertaken  by  the  Government 
if  serious  evils  are  to  be  corrected.  It  is  sometimes  argued 
that  the  law  cannot  fix  the  rate  of  wages,  but  this  is  contrary 
both  to  reason  and  experience.  The  law  cannot  fix  both  wages 
and  the  number  of  persons  wdio  shall  be  employed  at  those 
wages,  but  it  can  declare  that  no  one  shall  be  employed  in 
given  trades  unless  paid  certain  minimum  wages,  and  enforce 
its  decree.  The  result  may  be  an  addition  to  the  number  of 
dependents  who  are  "  unemployable  "'  at  the  wages  fixed  be- 
cause too  inefficient  to  earn  them,  but  it  may  be  better  and 
cheaper  for  society  to  support  such  persons  in  almshouses  than 
to  permit  their  competition  to  hold  the  wages  of  great  sections 
of  the  population  down  to  a  starvation  level.  In  order  to 
mark  off  the  dependent  from  other  classes  the  state  may  find  it 
necessary  itself  to  fix  a  standard  by  which  the  ability  of  the  indi- 
vidual for  independent  self-support  may  be  determined.  With- 
out desiring  to  advocate  the  establishment  by  law  of  stand- 
ard or  minimum  rates  of  wages  for  the  sweating  trades, 
the  amhor  wishes  to  insist  that  there  would  be  nothing 
in  this  policy  inconsistent  with  the  theory  of  wages  that  has 


Need  of 
Uniformity 
in  the 
United 
States 


The 
Future 


432        The  Legal  Regulation  of  Labour 

been  explained  in  these  pages,  and  that  it  merits  the  same 
unprejudiced  consideration  as  is  now  accorded  by  intelHgent 
people  to  proposals  for  restricting  the  employment  of  children 
or  women,  or  for  requiring  the  use  of  safety  appliances  in  con- 
nection with  dangerous  trades. 

In  the  United  States  a  serious  obstacle  to  the  progress  of 
labour  legislation  has  been  the  inability  of  State  legislatures  to 
agree  upon  uniform  laws.  Massachusetts  has  held  an  honour- 
able place  as  a  leader  in  factory  legislation,  but  of  late  years 
proposals  for  a  further  restriction  of  hours  have  been  met  there 
with  the  objection  that  the  cotton  mills  of  the  State  were  al- 
ready carrying  on  a  losing  battle  against  the  cotton  mills  of  the 
South,  which  are  free  from  all  but  the  mildest  labour  restric- 
tions. Exaggerated  as  this  objection  often  is  it  points  to  the 
need  of  uniform  labour  laws,  at  least  for  neighbouring  States, 
and  suggests  the  desirability  of  national  labour  legislation. 
Massachusetts,  the  State  which  from  its  position  of  leadership 
has  most  keenly  felt  the  absence  of  uniformity,  adopted,  in  1902, 
a  concurrent  resolution  favouring  an  amendment  to  the  United 
States  Constitution  which  should  empower  Congress  to  enact 
uniform  labour  laws  for  the  whole  country.  Another  move- 
ment in  the  same  direction  was  the  creation,  in  1883,  of  the 
Association  of  Officials  of  Bureaus  of  Labour  of  America, 
which  has  worked  earnestly  to  secure  uniformity  in  the  factory 
regulations  of  the  different  States.  The  progress  towards 
uniformity  that  has  been  made  encourages  the  hope  that  its 
absence  may  be  less  of  a  bar  to  improved  labour  regulations 
in  the  future  than  it  has  been  in  the  past. 

The  legal  regulation  of  labour,  which  w^as  scarcely  begun  in 
the  United  States  prior  to  the  Civil  War,  has  now  become  one 
of  the  most  important  functions  of  the  State  governments. 
Departments  of  factory  inspection  and  bureaus  of  labour  statis- 
tics have  been  created  by  all  of  the  States  in  which  manufactur- 
ing is  an  important  industry,  and  the  annual  and  special  re- 
ports of  these  bodies  aft'ord  voluminous  information  in  regard 
to  the  labour  conditions  which  require  regulation.  Not  a  year 
passes  that  some  of  the  States  do  not,  on  the  basis  of  this  in- 
formation, add  important  provisions  to  their  codes  of  labour 
law  and  that  the  machinery  for  enforcing  these  codes  is  not 


The  Future  433 

improved.  Althoug-h  much  remains  to  be  done,  there  is  per- 
haps no  field  of  legislation  in  which  progress  may  be  so  con- 
fidently expected  in  future  years,  nor  in  which  the  results  are 
likely  to  be  more  generally  beneficial. 

REFERENCES  FOR   COLLATERAL   READING 

The  literature  bearing  on  labour  regulations  is  of  a  somewhat  technical 
character.  *S(i/nson,  Handbook  to  the  Labour  Laws,  is  the  standard 
work  for  the  United  States.  More  exhaustive  is  the  Report  of  the 
United  States  Department  of  Labour  on  Labour  Laws  in  the  United 
States  (Second  Special  Report,  1896),  wliich  is  brought  down  to  date 
by  the  Bulletins  of  Labour  of  the  same  Department.  Volumes  V.  and 
XVI.  of  the  Report  of  the  United  States  Industrial  Commission 
contain  digests  of  the  labour  laws  of  the  United  States  and  of  foreign 
countries.  Discussions  of  the  history  and  effects  of  labour  legislation 
will  be  found  in  North,  Factory  Legislation  in  New  England 
(against)  and  Whiitelsey,  Massachusetts  Labour  Legislation  (for). 
A  good  statement  of  the  arguments  for  child  labour  laws  is  given 
in  *  Murphy,  The  Case  against  Child  Labour,  and  The  South  and  her 
Children.  Other  references  are  given  in  *Marot,  A  Handbook  of 
Labour  Literature. 

The  history  of  labour  legislation  in  Great  Britain  is  treated  in  *  Von 
Plener,  English  Factory  Legislation  (1876),  and  *HutchiHS  and 
Harrison,  A  History  of  Factory  Legislation  (1903).  The  laws  now 
in  force  are  given  in  Abraham  and  Davies,  The  Factory  Acts.  A 
good  statement  of  the  arguments  for  labour  laws  is  given  in  *Mrs. 
IVebd,   The  Case  for  the  Factory  Acts. 

The  subject  of  industrial  insurance  is  treated  fully  in  *  Willoughby, 
Workingmen's  Insurance,  and  the  Report  of  the  New  York  Bureau 
of  Labour  Statistics  for  1899. 


CHAPTER  XXIII 
LEGAL   AND   NATURAL   MONOPOLIES 

Importance  §  246.  As  explained  in  Chapter  XI.  the  essence  of  monopoly 
Monopoly  ^^  ^"^^  control  over  the  supply  of  an  economic  good  as  enables 
Problem  the  monopolist  to  regulate  its  price.  In  Chapter  XXI,  we  con- 
sidered cases  of  such  control  exercised  by  trade  unions  and 
designed  to  enhance  wages,  or  the  price  of  labour.  Much  more 
common  and  also  more  menacing  to  general  well-being  are 
monopolies  which  consist  in  control  over  the  supplies  of  com- 
modities. Such  monopolies  have  it  in  their  power  in  greater 
or  less  degree  to  compel  the  public  to  pay  regularly  and  con- 
tinuously for  the  commodities  they  control  higher  prices  than 
are  needed  to  cover  the  expenses  of  their  production,  includ- 
ing a  fair  wages  of  management.  This  power  is  not  unlike 
the  power  to  tax  which  is  exercised  by  the  state  itself.  By  its 
means  the  favoured  few  who  control  monopolistic  enterprises 
derive  monopoly  profits  at  the  expense  of  the  many.  The  magni- 
tude of  these  profits,  which  under  a  system  of  free,  all-sided 
competition  would  be  diffused  throughout  the  community  in  the 
form  of  cheaper  commodities,  is  one  circumstance  that  lends  an 
interest  to  the  monopoly  problem.  Another  and  equally  im- 
portant circumstance  is  the  manifest  injustice  involved  in  per- 
mitting a  few  persons  to  enjoy  incomes  from  which  the  many 
are  debarred.  For  these  and  other  reasons  the  monopoly 
problem  is  one  of  the  most  important  practical  questions  with 
which  economics  has  to  deal.  In  the  following  sections  the 
principal  types  of  monopolies  that  are  found  in  the  United 
States,  the  grounds  on  which  they  rest,  and  the  efforts  that 
have  been  made  to  regulate  and  control  them,  are  considered. 
Legal  monopolies,  as  the  simplest  type,  first  merit  attention. 
Public  §  247.  Legal  monopolies,  as  already  stated,  may  be  either 

Monopolies   public  or  private.     Public  legal  monopolies  embrace  not  merely 
public  businesses  of  monopolistic  character,  but  public  services 

434 


Purposes  of  Such  Monopolies  435 

which  the  state  alone  can  render,  such  as  the  granting?  of 
patents,  copyrights,  hcenses,  and  divorces,  the  registration  of 
mortgages,  wills,  and  other  legal  papers,  the  incorporation  of 
companies  with  limited  liability,  etc.  The  latter  are  a  con- 
venient means  of  legal  control  of  the  relations  which  they  affect 
and  are  common  to  all  civilised  countries.  In  the  United 
States  they  are  rendered  as  a  rule  by  State,  county,  or  municipal 
governments,  with  the  result  that  the  greatest  diversity  of 
practice  with  reference  to  them  prevails  in  dift'ercnt  sections. 
Usually  the  charges  for  such  services  arc  made  just  high 
enough  to  cover  the  expense  which  they  entail,  and  in  conse- 
quence they  are  not  a  source  of  monopoly  profit.  Exceptions 
to  this  statement  are  the  charges  for  liquor  licenses  and  for 
the  incorporation  of  companies,  which  are  important  sources 
of  public  revenue. 

The  direction  and  management  of  different  branches  of  busi-  Purposes 
ness  have  been  assumed  by  states  for  a  variety  of  reasons.     In  Monopolies 
Norw^ay,  moral  considerations  have  led  the  Government  to 
convert    the    liquor   business    into    a    public    legal    monopoly. 
The  tobacco  monopoly  of  France    and  the  salt  monopoly  of 
Saxony  aie  conducted  for  revenue.     In  Prussia  the  state  has 
taken  charge  of  the  railway  business,  partly  for  revenue,  but 
chiefly  to  insure  reasonable  and  uniform  rates  to  all  shippers 
and  ready  control  of  transportation  facilities  in  time  of  war  or 
other  public  emergency.  The  chief  public  legal  monopoly  in  the 
United  States,  the  post-office,  was  undertaken  with  a  view  to 
facilitating  and  cheapening  communication  between  different 
sections  of  the  country,  and  these  objects  have  always  been 
made  more  prominent  than  considerations  of  revenue.     In  fact 
it  may  be  doubted  whether  at  the  present  time  desire  for  rev- 
enue would  be  accepted   in  any   Western   country   having  a 
representative  government  as  an  adequate  reason  for  making 
a  business  a  public  legal  monopoly.     In  the  United  States 
especially,  public  opinion  is  decidedly  opposed  to  public  mo- 
nopolies managed  merely  for  profit.     The  most  common  reason 
for  advocating  and  defending  public  legal  monopolies  is  that 
the  businesses  under  consideration  require  special  regulation  in 
the  interest  of  public  morals,  as  in  the  case  of  the  liquor  busi- 
ness, or  that  they  are  natural  monopolies  in  which  the  public 


The 
United 
States 
Post-oflfice 


private 
Legal 

Monopolies 
in  Great 
Britain 


436         Legal  and  Natural  Monopolies 

has  a  vital  interest  and  that  public  ownership  and  operation 
offer  the  only  satisfactory  means  of  adequate  control. 

The  United  States  Post-office  is  a  good  example  of  a  public 
legal  monopoly  which  renders  more  efficient  service  than  a 
private  business  organised  for  profit  could  possibly  do.  The 
two  aspects  in  which  its  policy  differs  strikingly  from  that  of 
businesses  organised  for  private  ends  are  that  it  undertakes,  re- 
gardless of  cost,  to  bring  the  mails  within  the  easy  reach  of 
every  inhabitant  of  the  country,  and  that  its  charge  for  carry- 
ing mail  matter  is  the  same  to  all  its  patrons  and  invariable, 
irrespective  of  the  distance  within  the  country  to  be  traversed. 
The  educational  and  commercial  value  of  these  departures 
from  ordinary  business  policy  could  not  easily  be  exaggerated. 
Even  if  it  could  be  proved  that  certain  services,  such  as  carry- 
ing the  mails  between  the  large  centres  of  population,  could  be 
performed  more  cheaply  if  the  business  were  in  private  hands, 
the  advantage  would  still  lie,  in  the  opinion  of  most  thoughtful 
persons,  with  the  public  monopoly.  So  general,  in  fact,  is  the 
approval  of  the  Federal  Post-office  in  the  United  States  that  its 
success  is  commonly  made  the  point  of  departure  for  argu- 
ments in  favour  of  the  public  ownership  and  operation  of  a 
telegraph  monopoly,  a  telephone  monopoly,  and  even  a  railroad 
monopoly.  Opponents  of  the  latter,  on  their  side,  rarely  take 
exception  to  the  statement  that  the  post-office  has  w^orked  ad- 
mirably, but  confine  themselves  to  pointing  out  the  respects  in 
which  the  telegraph,  telephone,  and  railway  businesses  differ 
from  that  of  carrying  the  mails,  and  concluding  that  the  argu- 
ment from  similarity  is  fallacious.  The  argimients  for  and 
against  the  policy  of  making  such  businesses  public  legal  mo- 
nopolies are  considered  in  the  next  chapter. 

§  248.  The  development  of  private  legal  monopolies  presents 
one  of  the  most  interesting  chapters  in  the  history  of  English 
law.  Reference  has  already  been  made  to  the  prevalence  of 
such  monopolies  in  the  days  of  Elizabeth  and  the  first  Stuarts, 
In  1602  in  the  case  of  Darcy  vs.  Allen,  an  English  court  de- 
clared a  patent  granting  the  exclusive  right  to  manufacture 
playing  cards  for  a  period  of  twenty-one  years  unlawful.  The 
Court  held  that,  "  All  trades,  as  well  mechanical  as  others, 
which  prevent  idleness  (the  bane  of  the  Commonwealth)  and 


Private  Legal  Monopolies  437 

exercise  men  and  youth  in  labour  for  the  maintenance  of  them- 
selves and  their  families,  and  for  the  increase  in  their  substance 
to  serve  the  Queen  when  occasion  shall  require,  are  profitable 
for  the  Commonwealth ;  and  therefore  the  grant  to  the  plaintiff 
is  against  the  common  law  and  the  benefit  and  the  liberty  of 
the  subject."  Notwithstanding  this  decision  grants  of  mo- 
nopolies continued  to  be  made,  and  this  led  Parliament  to  inter- 
vene with  the  comprehensive  Statute  of  Monopolies  in  1624, 
which  provided :  "  That  all  monopolies,  and  all  commissions, 
grants,  licenses,  charters,  letters  patent,  heretofore  made  or 
granted  or  benefits  to  be  made  or  granted  to  any  person  or  per- 
sons, bodies  politic  or  corporate  whatsoever,  of  or  for  the  sole 
buying,  selling,  making,  or  using  of  anything  within  this 
realm,  or  the  dominion  of  Wales,  or  of  any  other  monopolies 
...  are  altogether  contrary  to  the  laws  of  this  realm,  and  so 
are  and  shall  be  utterly  void  and  of  none  effect  and  in  no  wnse 
to  be  put  in  use  or  execution."  Exceptions  were  made  of 
patents,  for  new  industries  or  inventions,  which  might  be 
granted  for  twenty-one  years,  and  of  patents  for  new  processes, 
which  were  limited  to  fourteen  years.  The  monopolies  of  for- 
eign trading  companies  were  also  exempted  from  the  Act,  as 
were  the  businesses  of  printing,  of  manufacturing  saltpetre, 
gunpowder,  ordnance,  and  shot,  and  of  alum  mining.  By 
later  acts  all  of  these  exceptions  were  removed,  except  those  in 
favour  of  patents  for  new  inventions  and  copyrights  for  literary 
and  artistic  productions. 

When  the  Constitution  of  the  United  States  was  adopted,  the  In  the 
doctrine  which  had  become  firmly  established  in  England  that  states 
monopolies,  in  the  sense  of  exclusive  grants,  arc  abhorrent  to 
the  common  law,  was  accepted  as  a  fundamental  principle.  Con- 
gress was  given  power*  to  "  promote  the  progress  of  science 
and  useful  arts  by  securing,  for  limited  times,  to  authors 
and  inventors  exclusive  rights  to  their  respective  writings  and 
discoveries,"  but  it  was  not  given  power  to  grant  monopolies 
for  other  purposes,  and  the  courts  have  uniformly  held  that  it 
has  no  such  power.  They  have  been  equally  unanimous  in  deny- 
ing any  such  power  to  State  legislatures,  except  in  connection 
with  the  grant  for  the  public  benefit,  of  special  franchises  to 
*  Article  I.,  Section  VIII.,  of  the  Federal  Constitution. 


The 

Patent 

System 


Arguments 
for  and 
against 
Patents 


438  Legal  and  Natural  Monopolies 

public-service  corporations  such  as  street-railway,  gas,  and  elec- 
tric-lighting co«npanies.  It  follows  from  these  decisions  that 
private  legal  monopolies  can  exist  in  the  United  States  only 
under  the  protection  of  the  patent  or  copyright  laws  or  under 
grants,  in  the  nature  of  special  franchises,  from  the  State  legis- 
latures, or  their  agents,  municipal  councils. 

§  249.  Under  the  patent  law  now  in  force  in  the  United 
States,  "  any  person,  native  or  foreign,  who  has  invented  or 
discovered  any  new  and  useful  art,  machine,  manufacture,  or 
composition  of  matter,  or  any  new  and  useful  improvement 
thereof,  not  known  or  used  in  this  country,  and  not  patented  or 
described  in  any  publication  in  this  or  any  foreign  country,  be- 
fore his  invention  or  discovery  thereof,  and  not  in  public  use 
or  on  sale  for  more  than  two  years  prior  to  his  application, 
unless  the  same  is  proved  to  have  been  abandoned,  may  upon 
payment  of  the  fees  required  by  law  and  other  due  proceed- 
ings had,  obtain  a  patent  therefor."  The  Patent  Office  is  a 
branch  of  the  Department  of  the  Interior.  It  employs  over  a 
hundred  trained  examiners,  whose  business  it  is  to  study  the 
specifications  submitted  and  satisfy  themselves  that  the  inven- 
tion or  discovery  for  which  a  patent  is  sought  falls  within  the 
requirements  of  the  law.  A  patent  gives  to  the  inventor  the 
sole  right  to  manufacture  and  sell  his  invention  for  seventeen 
years,  unless  it  has  been  previously  patented  abroad,  when  the 
United  States  patent  expires  with  that  granted  by  the  foreign 
country.  In  Great  Britain  the  life  of  a  patent  is  shorter,  being 
only  fourteen  years,  but  under  certain  conditions  it  may  be  re- 
newed for  seven  or  even  fourteen  years  longer,  so  the  prac- 
tical difference  between  the  two  countries  is  not  great. 

Three  different  arguments  are  advanced  in  favour  of  grant- 
ing patents.  The  usual  American  argument  is  that  they  foster 
invention  and  discovery  by  insuring  to  the  inventor  adequate 
reward  for  his  trouble.  In  England  a  common  argument  is 
that  they  induce  inventors  to  make  their  discoveries  public.  A 
third  argument  which  applies  to  the  more  complex  inventions 
of  recent  years  is  that  but  for  the  protection  which  a  patent 
affords,  capitalists  would  be  unwilling  to  risk  their  means  in 
the  development  of  new  processes.  There  is  doubtless  reason 
in  each  one  of  these  contentions  and  together  they  are  usually 


Objections  Answered  439 

accepted  as  sufficient  justification  for  some  kind  of  a  patent 
policy.  The  present  patent  system  of  the  United  States  is, 
however,  criticised  on  several  grounds  :  (  i )  Some  people  deny 
that  men  who  have  a  genius  for  invention  and  discovery  re- 
quire any  special  inducement  to  follow  their  natural  bent.  (2) 
Others  point  out  that  in  practice  those  who  reap  the  rewards 
of  monopoly  under  our  patent  laws  are  more  often  business 
men  and  corporations,  who  acquire  control  of  patents  and  turn 
them  to  commercial  account,  than  the  inventors  themselves. 
(3)  It  is  urged  that  important  inventions  and  discoveries  are 
the  joint  product  of  many  minds  and  that  to  unduly  reward  the 
lucky  individual  who  gets  first  to  the  patent  office  is  to  disre- 
gard the  services  of  other  investigators.  (4)  It  is  maintained 
that  a  large  proportion  of  the  patents  taken  out  are  suppressed 
by  those  who  have  vested  interests  to  protect  and  that  in 
consequence,  instead  of  promoting  progress,  our  patent  law 
actually  retards  it.  (5)  The  fact  that  the  present  rapid  prog- 
ress in  methods  of  production  renders  most  processes  and 
methods  obsolete  before  they  have  been  in  use  seventeen  years 
is  emphasised,  and  it  is  asserted  that  for  this  reason  improved 
processes  are  usually  of  little  value  to  the  public  when  the 
patents  on  them  expire. 

In  answer  to  the  first  of  these  objections  it  may  be  asserted  Objections 
that  while  genius  needs,  perhaps,  no  incentive  to  follow  its  °svvere 
natural  bent,  talent  does,  and  that  the  great  majority  of  inven- 
tions and  discoveries  have  been  made  not  as  strokes  of  genius, 
but  by  laborious  study  and  experiment.  Under  these  circum- 
stances it  can  hardly  be  granted  that  inventors  and  discoverers 
are  not  influenced  like  other  people  by  the  expectation  of  finan- 
cial return.  To  the  second  point  it  may  be  answered  that  in 
many  cases  making  an  invention  commercially  successful  is  as 
important  a  service  as  making  the  invention.  For  example,  it 
would  be  difficult  to  decide  in  the  case  of  the  steam  engine 
whether  Watt  or  his  business  partner,  Boulton,  deserved  most 
credit  for  the  ultimate  result.  But  for  Boulton,  Watt  would 
almost  certainly  have  died  a  broken-hearted  "  visionary  '"  and 
his  experiments  with  steam  would  be  remembered  only  by 
antiquarians.  Nor  is  it  true  that  any  large  proportion  of  in- 
ventors fail  to  get  some  return  for  their  inventions  when  the 


440  Legal  and  Natural  Monopolies 

latter  prove  to  be  commercially  successful.  They  are  apt  to 
be  men  who  are  carried  away  by  one  success  and  who  squander 
all  they  receive  from  one  invention  in  the  vain  effort  to  im- 
press upon  the  public  the  value  of  others.  A  patent  law  which 
would  make  all  successful  inventors  die  rich  would  need  to 
modify  human  nature.  The  third  criticism  overlooks  the  real 
justification  of  a  patent  policy.  No  scheme  could  be  devised 
that  would  reward  inventors  in  proportion  to  their  merits.  All 
that  can  be  done  is  to  offer  them  a  special  stimulus,  and  this 
the  present  law  does  by  giving  the  reward  to  him  wdiose  appli- 
cation for  a  patent  is  first  received. 

Proposed  The    fourth    and    fifth    objections    point    to    two    definite 

Reforms  m  ,  .       ,  ,  .    ,      ^  _    .      ,   „ 

the  Patent    weaknesses  m  the  present  patent  law  of  the  United  States :  it 

System  permits  the  suppression  of  inventions,  and  it  grants  a  monopoly 

for  the  same  rather  long  period  of  years  to  all  inventors,  irre- 
spective of  the  character  of  their  inventions  or  the  use  to  which 
they  are  put.  It  is  easier  to  recognise  these  defects  than  to  sug- 
gest satisfactory  remedies.  To  cure  the  first,  it  has  been  proposed 
that  the  law  require  proof  from  the  patentee  that  some  use, 
which  benefits  the  public,  is  being  made  of  his  patent  wdthin 
three  or  four  years  of  the  time  w^hen  it  is  taken  out,  and  that 
in  the  absence  of  such  proof  the  patent  be  revoked.  This  plan 
has  been  tried  in  other  countries  and  found  to  work  satisfac- 
torily. Various  remedies  have  been  suggested  for  the  second 
defect.  The  Government  might  reserve  the  right  to  buy  up  a 
patent  at  an  appraised  valuation,  whenever  this  course  seemed 
expedient.  A  decisive  objection  to  this  plan  is  that  under  our 
form  of  government  there  is  little  reason  to  think  that  such  a 
right  would  ever  be  exercised.  Another  plan  is  to  compel  those 
owning  patents  to  share  them  wnth  others  on  payment  of  a  fair 
rental  or  royalty.  The  difficulty  here  would  be  to  determine 
what  a  "  fair  "  return  might  be.  A  third  plan  is  to  impose  a 
progressive  tax  on  patents,  increasing  year  by  year,  with  the 
provision  that  failure  to  pay  the  tax  would  work  forfeiture  of 
the  patent  right.  Finally,  it  has  been  proposed  to  reduce  the 
term  for  which  patents  are  granted,  from  seventeen  to  ten 
years  and  to  follow  England  in  permitting  renewals  for  five  or 
ten  years  in  cases  where  the  public  interest  seems  to  require  it. 
The  last  plan  has  the  advantage  of  simplicity.     It  also  meets 


Monopoly  Profits  from  Patents         441 

more  fully  than  any  otiicr  single  change  proposed  the  objec- 
tions urged  against  the  present  system,  without  itself  being 
open  to  serious  objection. 

Patents  in  the  United  States  are  the  direct  and  indirect  cause  Patents  as 
of  large  monopoly  profits.  Some  of  the  more  successful,  such  ^lonyp^w^ 
as  the  Bell  telephone  patent,  have  earned  large  fortunes  for  Profits 
hundreds  of  different  people  and  helped  to  build  up  monopolies 
which,  unless  controlled  as  regards  their  methods  of  doing 
business  and  rates  of  charge,  will  continue,  long  after  the 
patents  have  expired,  to  yield  large  monopoly  returns.  More- 
over patents  have  become  so  numerous  of  late  years,  being 
now  issued  at  the  rate  of  26,000  a  year  (1900),  that  they  figure 
in  nearly  every  branch  of  manufacturing  enterprise.  Nearly 
every  one  of  the  trusts  organised  in  1898  and  1899  controlled 
a  larger  or  smaller  number  of  patents  and  in  the  case  of  some 
of  them,  such  as  the  bicycle  trust,  the  fact  that  all  important 
patents  were  owned  by  the  combination  was  urged  as  one  of 
the  surest  grounds  for  its  expected  success.  Important  as  are 
patents  as  a  source  of  monopoly  income,  however,  it  would  be 
easy  to  exaggerate  the  extent  to  which  they  lead  to  the  suppres- 
sion of  competition.  A  large  number  of  them  are  for  the  pro- 
tection of  rival  processes  and  serve  to  stimulate  rather  than  to 
diminish  competition  between  those  employing  the  different 
methods.  Only  when  a  patented  process  is  distinctly  superior 
to  all  other  known  processes  for  etfecting  the  same  result  does 
it  give  rise  to  an  exclusive  monopoly,  and  even  such  monopoly 
is  subject,  of  course,  to  the  limitations  which  have  been  already 
discussed. 

Besides  granting  patents,  the  United   States   Patent  Office  Registered 
registers  labels  and  trade-marks  on  receipt  of  a  modest  fee.  Oracle  ^ 
The  latter  have  been  of  importance  chiefly  in  giving  a  solid  Marks 
basis  to  what  is  known  as  the  "  good  will  "  of  a  business.     A 
manufacturer  who  acquires  a  reputation  because  of  the  quality 
of  his  products  may  adopt  a  trade-mark  to  distinguish  them 
from  others.     In  the  organisation  of  trusts,  brands  and  trade- 
marks have  been  frequently  recognised  as  among  the  valuable 
assets  of  the  businesses  to  be  absorbed. 

§  250.  The    basis    of    copyright,    "  the    exclusive    right    to  ^\^^   ^     , 
multiply  for  sale  copies  of  works  of  literature  or  art,"  is  similar  Copyright 


442  Legal  and  Natural  Monopolies 

to  that  of  patent  right,  and  the  reasons  for  it  are  even  more 
obvious.  The  introduction  of  copyright  in  Europe  followed 
soon  after  the  invention  of  printing,  but  the  first  general  Eng- 
lish law  on  the  subject  was  not  enacted  until  1710.  At  present 
copyright  in  England  covers  the  life  of  the  author  and  a  period 
of  seven  years  after  his  death,  with  the  proviso  that  the  total 
period  of  monopoly  is  not  to  exceed  forty-two  years.  Copy- 
right was  common  in  the  United  States  before  the  adoption  of 
the  Federal  Constitution.  The  first  national  copyright  law  was 
passed  in  1790  and  resembled  closely  the  English  statute  of 
1710.  It  was  amended  several  times  and  finally  superseded  by 
the  general  Act  of  1870.  The  period  for  a  copyright  in  the 
United  States  is  twenty-eight  years,  but  the  author  or  his 
direct  heirs  have  the  privilege  of  securing  a  renewal  for  four- 
teen years  more,  so  that  the  total  period  is  forty-two  years  as 
in  England.  In  comparison  with  the  laws  of  other  countries 
these  provisions  are  none  too  liberal.  In  Mexico  copyright  is 
perpetual.  In  Spain  it  continues  eighty  years  after  an  author's 
death,  in  France  fifty  years,  and  in  Germany  thirty  years. 
Defects  in  Although  the  copyright  law  grants  a  monopoly  for  a  longer 
lT\v^^^^^  period  than  the  patent  law,  little  if  any  fault  is  found  with  it 
because  the  monopoly  is  of  such  a  limited  character.  Even 
with  this  protection,  authors  and  artists  as  a  class  are  far  from 
enjoying  excessive  incomes  and  those  who  succeed  in  obtain- 
ing large  monopoly  profits  from  their  products  serve  as  a 
needed  incentive  to  the  great  army  who  find  it  difficult  to  make 
even  a  living  from  their  work.  Instead  of  being  criticised  for 
being  too  liberal  in  its  provisions,  the  American  copyright  law 
is  attacked  because  it  does  not  extend  the  same  protection 
within  the  United  States  to  the  works  of  foreign  authors  and 
artists  which  the  latter  enjoy  at  home.  A  discussion  of  this 
objection  would  carry  us  too  far  from  the  subject  of  monopolies 
and  monopoly  profits,  but  it  certainly  seems  anomalous  for  a 
country  which  protects  nearly  all  industries  which  require  it, 
to  allow  its  authors  and  artists  to  be  subjected  to  the  competi- 
tion of  pirated  editions  and  copies  of  the  works  of  foreigners. 
The  provisions  of  the  Act  of  1891,  granting  to  foreigners  on 
reciprocal  terms  the  privilege  of  securing  copyrights  in  the 
United  States  by  having  their  books  printed  simultaneously  in 


Natural  Monopolies  of  Situation        443 

this  country,  remedies  the  evil  only  for  the  works  of  authors  of 
established  reputation. 

§251.  Of  all  forms  of  monopolies  those  which  are  most  Natural 
widespread  in  the  United  States  are  what  we  have  styled  nat-  fn°"e^°'^^^ 
ural  monopolies.  Under  this  head  are  included  monopolies  of  United 
situation,  such  as  the  anthracite-coal  combination,  and  monop-  ^  ^* 
dies  of  organisation,  such  as  municipal  gas,  electric  lighting, 
and  street-railway  companies,  telegraph,  telephone,  express, 
and  railway  companies,  and,  in  fact,  all  transportation  indus- 
tries except  those  which  use  the  free  public  streets  or  free  pub- 
lic waterways  and  enjoy  no  advantage  over  other  patrons  of 
the  same  facilities.  The  importance  of  these  businesses  scarcely 
needs  to  be  emphasised.  The  anthracite  coal  strike  of  1902 
demonstrated  conclusively  the  country's  dependence  upon  that 
commodity.  Its  dependence  upon  monopolies  of  organisation  is 
even  more  pronounced.  As  industry  is  now  organised  the 
services  rendered  by  transportation  companies  are  indispensa- 
ble to  the  business  success  of  nine-tenths  of  the  entrepreneurs 
in  every  community.  Water,  gas,  or  electric  light,  and  street- 
railway  transportation  have  become  necessaries  of  life  to 
dwellers  in  cities.  Quite  as  important  is  steam-railroad  trans- 
portation. Without  it  farmers  and  manufacturers  would  be 
deprived  in  large  measure  of  the  markets  for  their  goods  and 
compelled  to  turn  their  attention  to  production  for  the  satisfac- 
tion of  their  own  wants  or  to  supply  the  restricted  local 
markets  that  could  be  reached  through  other  means  of  trans- 
portation. The  conviction  that  the  transportation  businesses 
enumerated  are  not  adequately  regulated  by  competition  is  only 
gradually  taking  shape  in  the  public  consciousness.  For  this 
reason  a  good  deal  of  attention  is  given  in  the  following  sec- 
tions to  the  explanation  of  the  circumstances  which  make  these 
businesses  natural  monopolies  and  therefore  proper  objects  of 
legal  regulation  and  control. 

§  252.  Among  natural  monopolies  of  situation  are  included  Natural 

*  Afl' 

unique  mineral   springs,   like  those  that  have  made   famous  of  Situation 
Carlsbad  in  Austria  and  Saratoga  in  the  United  States,  and  a 
host  of  other  minor  monopolistic  enterprises.     It  may  be  ques- 
tioned whether  any  out-and-out  natural  monopoly  of  situation 
that  is  of  national  importance  has  yet  been  perfected  in  the 


The 

Anthracite- 
coal  Com- 
bination 


444  Legal  and  Natural  Monopolies 

United  States.  The  combination  between  the  producers  and 
carriers  of  anthracite  coal  in  Pennsylvania  has,  however, 
reached  a  point  at  which  it  presents  many  of  the  characteristics 
of  monopoly,  and  a  description  of  it  seems  not  out  of  place  in 
this  connection. 

The  anthracite-coal  combination  has  been  rendered  possible 
by  the  limited  area  within  which  anthracite  coal  is  found  in  the 
United  States.  The  whole  field  is  only  496  square  miles  in  ex- 
tent and  fully  nine-tenths  of  the  product  comes  from  the  five 
Pennsylvania  counties  located  near  the  head  waters  of  the 
Schuylkill  and  Lehigh  rivers.  Into  this  limited  territory  nine 
railroads  have  extended  their  lines  and  now  serve,  with  the 
canals  which  they  control,  as  the  sole  means  of  transporting 
the  product  from  the  mines  to  the  country's  centres  of  popula- 
tion. As  long  ago  as  1871  the  railroads,  under  the  leadership 
of  the  Reading,  adopted  the  policy  of  buying  up  coal  lands  with 
a  view  to  securing  an  assured  share  of  the  coal  traffic.  It  has 
taken  them  many  years  to  acquire  control  of  the  industry 
and  to  agree  among  themselves  as  to  the  manner  in  which 
it  should  be  conducted.  First,  it  was  necessary  for  them 
to  enter  into  traffic  agreements  among  themselves  that  would 
prevent  independents  from  securing  discriminating  rates  on  the 
basis  of  which  they  might  undersell  the  railroad  coal  com- 
panies. This  being  accomplished,  the  next  step  was  to  raise 
freight  rates  to  a  point  that  would  make  the  coal  business  rela- 
tively unprofitable  to  independent  producers  and  induce  them 
to  sell  out  to  the  railroads  on  moderate  terms.  The  same  rates 
were  charged  railroad  and  independent  coal  companies  and  this 
made  it  difficult  for  the  latter  to  prove  that  they  w^ere  being 
treated  unfairly,  although  it  was  obvious  that  from  the  point  of 
view  of  the  railroads  it  was  immaterial  that  their  collieries  were 
making  small  profits  so  long  as  they  themselves  were  prosper- 
ing. As  a  result  of  these  policies  the  coal  holdings  of  the  rail- 
roads were  year  by  year  extended  at  the  same  time  that  their 
conflicting  interests  were  gradually,  through  consolidations  and 
communitv  of  interests  arangements,  brought  into  greater  har- 
mony. When  the  anthracite  miners'  strike  of  1900  was  declared 
(September  17),  conditions  were  ripe  for  a  few  final  moves  in 
the  game  of  combination.     In  December  of  that  year,  J.  P. 


Its  Present  Status  445 

Morgan  &  Co.  negotiated,  for  the  Erie  Railroad,  the  purchase 
of  the  Pennsylvania  Coal  Company,  one  of  the  largest  and 
most  successful  of  the  independent  producers,  and  in  this  way 
defeated  a  project  for  building  an  independent  road  from  the 
coal  region  to  tide-water.  In  January,  1901,  the  Central  Rail- 
road of  New  Jersey  was  purchased  through  the  same  influence 
and  turned  over  to  the  Reading  Railroad.  The  effectiveness  of 
these  changes  in  consolidating  the  monopoly  was  shown  by  the 
fact  that  the  higher  price  for  anthracite  coal,  which  was  the 
natural  consequence  of  the  strike  of  1900,  was  continued  and 
even  increased  in  1901  and  1902,  to  the  profit  of  the  railroads. 
According  to  a  reliable  estimate  the  railroads  controlled  in 
1901  some  96  per  cent,  of  the  anthracite  deposits  and  actually 
owned  over  90  per  cent.  The  dependence  of  the  individual 
operators  who  remain  in  the  field  upon  the  coal  roads  for  access 
to  the  markets  insures  in  ordinary  times  their  acceptance  of 
any  agreements  which  the  managers  of  the  latter  may  enter 
into  for  the  common  benefit. 

At  the  present  time,  July,  1903,  there  is  every  mdication  that  Its  Present 
the  anthracite-coal  combination  enjoys  complete  control  over  ^^^^"^ 
the  supply  of  that  commodity  and  that  its  price-making  power 
is  limited  only  as  is  that  of  every  monopoly  by  the  presence  of 
other  commodities,  such  as  bituminous  coal,  petroleum,  and 
gas,  which  may  be  substituted  for  its  product.  The  monopoly 
is  no  less  real  because  the  only  bond  which  holds  the  road 
together  is  a  "  gentlemen's  agreement  "  which  could  not  be  en- 
forced in  a  court  of  law.  As  long  as  the  agreement  is  ad- 
hered to,  the  effect  is  the  same  as  though  all  the  roads  were 
owned  by  a  single  corporation.  The  competition  between 
anthracite  coal  a-nd  the  substitute  articles  mentioned  is  now  so 
slose  for  several  important  uses  that  it  acts  as  an  efficient  check 
on  the  rapacity  of  the  combination.  It  did  not  prevent,  how- 
ever, as  already  suggested,  higher  prices  for  anthracite  coal 
during  1901  and  1902  than  had  been  known  for  several  years, 
ncr  did  it  prevent  the  general  prosperity  of  those  years  from 
showing  itself  in  an  increased  consumption  of  that  commodity 
in  spite  of  the  higher  prices.  The  result  was  a  larger  margin 
of  profit  on  a  larger  output  for  the  railroads  interested  in 
the  combination  and  their  stockholders. 


44^  Legal  and  Natural  Monopolies 

Need  of  Opinion  is  divided  as  to  whether  in  future  years  the  oppor- 

Resfiilation    .       .,  ,  ,      .  ,  , 

tunity    open    to    consumers    to    substitute    other    articles    for 

anthracite  coal  will  serve  as  a  sufficient  check  on  this  monopoly 
or  whether  legal  interference  will  be  necessary  if  the  interests 
of  the  public  are  to  be  protected.  There  seems  to  be  some 
ground  for  thinking  that  briquettes  of  bituminous  coal  may 
come  into  use  in  place  of  anthracite  for  ordinary  domestic  con- 
sumption in  the  near  future,  and  that  the  monopoly  is  now  near 
the  height  of  its  prosperity.  Should  this  view  prove  correct, 
legal  interference  will  be  unnecessary.  Without  attempting  to 
prophesy  we  may  lay  it  down  as  a  general  principle  that  the 
Government  has  not  only  the  right,  but  the  duty,  to  regulate  a 
natural  monopoly  like  the  anthracite-coal  combination  when 
it  appears  that  such  a  business  is  taking  advantage  of  its  posi- 
tion to  charge  exorbitant  prices  for  the  commodity  it  controls. 
Other    ^  Some  of  the  more  important  industrial  combinations,  such  as 

of  Situation  the  Standard  Oil  Company  and  the  United  States  Steel  Cor- 
poration, have  vmdertaken  to  acquire  control  of  the  sources  of 
supply  of  the  raw  materials  they  use.  In  neither  case  has  this 
development  gone  far  enough  to  justify  the  characterisation 
of  these  businesses  as  natural  monopolies  of  situation,  but  that 
their  managers  are  consciously  directing  them  towards  this 
goal  seems  apparent.  The  future  alone  can  tell  whether  the 
sources  of  supply  of  such  widely  distributed  materials  as 
petroleum,  iron  ore,  and  coking  coal  can  actually  be  controlled 
by  single  corporations.  To  the  extent  that  they  may  be,  the 
trusts  referred  to  may  become  natural  monopolies  of  situation 
instead  of  mere  capitalistic  monopolies. 
Natural  §  253.  The  second  class  of  natural  monopolies  embraces  all 

of  Organ-      businesses  whose  expenses  of  production  show  a  steady  tend- 
isatioa  ency  to  fall  as  the  size  of  the  business  grows.     Between  such 

businesses  competition  can  have  but  one  result,  combination, 
and  monopoly  once  established  can  maintain  itself  indefinitely 
because  it  can  conduct  its  large-scale  operations  more  cheaply, 
and  therefore  sell  more  cheaply,  than  any  small-scale  compet- 
itor that  may  be  tempted  into  the  field. 
The  The  transportation  and  delivery  of  water  to  each  house  in  a 

Supplying     ^'^^Y  '^^  ^  business  of  this  kind.     It  is  too  obvious  to  require  dis- 
Water  cussion  that  one  company  having  one  large  supply  pipe  and 


The  Business  of  Supplying  Water      447 

smaller  individual  pipes  for  each  house  can  supply  water  to  a 
single  street  more  economically  than  two  or  more  competing 
companies.  It  is  almost  equally  obvious  that  one  company  can 
supply  the  water  for  several  adjacent  streets  more  cheaply  than 
competing  companies  each  having  a  street  to  itself.  In  order 
to  pump  and  store  water  economically  it  is  necessary  to  do  it 
on  a  larger  scale  than  is  open  to  a  water  company  which  sup- 
plies houses  on  a  single  street.  As  regards  this  part  of  the 
business,  economical  production  requires  that  the  whole  of  a 
city  of  less  than  500,000  inhabitants  should  be  supplied  by  one 
company  and  that  proportionately  large  sections  of  larger  cities 
should  be  so  supplied.  Under  certain  circumstances  the  tend- 
ency towards  consolidation  in  this  business  in  a  great  city  may 
be  checked  when  each  of  several  water  companies  secures  a 
monopoly  of  the  business  of  supplying  water  in  a  particular 
section.  This  is  practically  the  situation  in  London  at  the 
present  time,  although  there  are  clear  indications  that  further 
consolidation  there  would  result  in  more  satisfactory  if  not  in 
cheaper  service.*  The  disadvantages  of  such  a  division  of  ter- 
ritory between  dififerent  companies  are :  ( i )  No  one  of  them  is 
in  a  position  to  carry  through  the  enormously  expensive  engi- 
neering feats  which  come  to  be  necessary  as  a  city  grows  and 
by  its  growth  pollutes  or  renders  inadequate  the  more  adjacent 
sources  of  water  supply.  (2)  When  some  unexpected  occur- 
rence cuts  off  the  source  of  supply  of  one  of  the  companies  its 
customers  are  subjected  to  the  inconvenience  and  even  danger 
of  a  water  famine.  A  large  company  can  afford  to  maintain 
storage  reservoirs  to  tide  it  over  such  periods.  (3)  The 
smaller  companies  cannot  afford  to  have  as  heads  of  their  de- 
partments as  able  men  as  the  large  company  can  afford  to  em- 
ploy. The  situation  in  regard  to  the  water  business  is  briefly 
then  as  follows :  One  company  must  have  a  monopoly  of  the 
business  for  each  street  in  order  to  render  the  service  with 
anything  approaching  economy.  It  will  render  more  eco- 
nomical service  if  its  monopoly  embraces  the  entire  city,  if  the 
latter  be  small,  or  a  considerable  section  of  the  city,  if  it  be 
large,  and  consolidation  is  sure  to  bring  the  business  to  this 
stage  of  development  if  it  is  allowed  to  grow  as  its  nature  de- 
mands.    Finally,  if  quality  and  continuity  as  well  as  expense 

•  Since  this  was  written  the  City  of  London  has  itself  effected   a 
consolidation  by  acquiring  the  property  of  all  the  water  companies. 


The  Gas 

and  Elec- 
tric Light 
Monopolies 


The  Street- 
Railway 
Monopoly 


448  Legal  and  Natural  Monopolies 

of  service  are  considered,  it  will  be  most  satisfactorj'  if  the 
monopoly  is  allowed  to  embrace  the  whole  of  even  the  largest 
city  and  if  not  even  the  semblance  of  competition  is  maintained. 

Quite  similar  to  the  case  of  a  water  company  are  the  cases 
of  gas  and  electric-lighting  companies.  They  also  use  main 
supply  pipes  or  wires  and  must  control  all  the  business  in  a 
large  section  of  a  city  in  order  to  be  conducted  most  economic- 
ally. Moreover,  for  them  the  consideration  in  regard  to  the 
grade  of  intelligence  that  can  be  employed  as  the  company  ex- 
pands is  of  the  utmost  importance  because  their  businesses  are 
more  complex.  Few  familiar  with  these  businesses  deny  that 
they  are  natural  monopolies  in  the  same  sense  as  the  water  busi- 
ness, or  think  that  competition  can  regulate  them,  except  that 
indirect  competition  which  consumers  themselves  set  up  be- 
tween gas,  electricity,  and  petroleum  as  means  of  lighting 
dwellings.  When,  as  is  frequently  the  case,  the  same  set  of 
men  control  the  municipal  gas  monopoly  and  the  electric-light 
monopoly,  even  this  competition  becomes  a  rather  unreliable 
dependence. 

§254.  The  street-railway  business  has  many  features  in  com- 
mon wath  the  businesses  just  described.  A  street-railway  com- 
pany must  also  have  a  monopoly  at  least  of  the  single  street  on 
which  its  cars  run,  partly  because  of  the  useless  duplication  of 
plant  that  would  result  if  a  rival  company  were  maintained,  and 
partly  because  of  the  physical  limitations  of  the  street  itself 
which  makes  even  one  set  of  tracks  a  serious  inconvenience  to 
the  public.  Rival  companies  may  be  chartered  to  run  cars  on 
adjacent  streets,  however,  and  this  was  the  usual  first  step  in 
the  history  of  the  relations  between  municipalities  and  street- 
railway  companies  in  the  United  States.  For  a  time  com- 
panies operating  parallel  lines  may  compete,  but  their  competi- 
tion, as  experience  has  demonstrated  over  and  over  again,  al- 
ways ends  in  consolidation.  Each  company  has  to  have  its 
full  equipment  of  tracks,  feed  barns  or  power  houses,  cars,  etc., 
and  the  most  expensive  of  these  items  stand  as  fixed  and  neces- 
sary charges,  irrespective  of  the  volume  of  business  wdiich  the 
company  handles.  Suppose  that  two  rival  companies  begin  by 
halving  the  business  for  the  section  of  the  city  w^hich  they 
serve.     If  their  tracks  are  but  a  square  apart  a  very  slight  ad- 


Reasons  for  Combination  449 

vantage  in  favour  of  either  will  divert  to  it  passengers  from 
the  other.  This  consideration  may  lead  one  to  lower  its  fares ; 
but  this  is  a  game  at  which  two  can  play  w'ith  about  equal  suc- 
cess and  its  sure  consequence  is  loss  of  profits  for  both  com- 
petitors. Realisation  of  this  fact  comes  quickly  and  causes  a 
first  step  towards  consolidation,  an  agreement  as  to  rates  of 
fare.* 

But  there  are  other  ways  in  which  passengers  may  be  at-  Reasons 
tracted  from  a  rival  line.  If  the  companies  start  as  horse-car  bination 
lines,  as  did  the  street-railway  companies  of  all  the  older 
cities  of  the  United  States,  superior  management  will  show 
itself  in  quicker  service.  Every  passenger  drawn  to  the  better 
line  will  add  nearly  his  entire  fare  to  its  profit  account — since 
the  fixed  charges  are  relatively  so  large  and  the  running  ex- 
penses, which  alone  increase  with  the  number  of  passengers 
carried,  relatively  so  small — and  will,  for  the  same  reason,  de- 
duct nearly  his  entire  fare  from  the  profit  account  of  the  rival 
company.  The  successful  competitor  has  thus  a  larger  and 
larger  profit  fund  with  which  to  improve  still  further  the 
quality  of  its  service,  while  the  other  company  is  forced  by  fall- 
ing profits  to  enter  upon  a  policy  of  retrenchment  and  economy 
which  will  drive  away  still  more  of  its  customers.  The  in- 
ferior company  may  struggle  on  and  pay  small  dividends  as 
long  as  both  lines  use  the  same  sort  of  power,  but  the  introduc- 
tion of  the  cable  or  trolley  system  by  the  superior  line  is  likely 
to  draw  away  so  many  of  the  passengers  of  the  other  that  it  is 
driven  into  bankruptcy — or  consolidation  with  its  rival.  This 
in  brief  is  the  story  of  the  street-railway  business  in  the  cities 
of  the  United  States.  Its  chapters  have  become  so  familiar  to 
street-railway  managers  that  they  now  usually  take  a  short  cut 
to  consolidation  as  soon  as  a  rival  company  is  chartered  to  run 
on  streets  parallel  to  their  own  lines.  Only  in  case  the  organ- 
isers of  the  new  company  demand  too  high  terms  is  the  experi- 
ment of  competition  actually  tried  and  the  question  decided,  as 

*  In  Philadelphia  a  Board  of  Presidents  of  City  Railways  was  formed 
as  early  as  May  24,  1S59,  barely  two  years  after  the  first  line  was 
built,  and  such  a  board  continued  to  fix  rates  of  fare  for  the  whole  city 
until  all  the  important  lines  were  merji^ed  in  the  Union  Traction  Com- 
pany in  1895.  Durinc:  all  t1iat  time  there  was  only  once,  and  then  only 
for  a  brief  interval,  any  competition  in  regard  to  rates  of  fare. 


Advan- 
tages of 
Combina- 
tion 


The 

Telephone 

Monopoly 


450  Legal  and  Natural  Monopolies 

in  the  mediseval  trial  by  combat,  which  contestant  is  to  absorb 
the  Hfe  of  the  other. 

The  advantages  of  consoHdation  in  the  street-railway  busi- 
ness are  similar  to  those  enumerated  in  connection  with  other 
natural  monopolies,  (i)  The  fixed  plant  may  be  more  fully 
and  more  economically  utilised.  Thus,  cars  may  be  run  only 
over  the  streets  that  are  most  conveniently  situated  for  traffic, 
power  stations  may  be  placed  more  advantageously,  and  the 
rolling  stock  may  be  better  adapted  to  the  tastes  of  different 
classes  of  patrons,  new  cars  being  used  on  fashionable  streets 
and  old  equipment  worn  out  where  it  will  excite  least  criticism. 
(2) Superior  ability  may  be  employed  in  each  department  and 
specialisation  may  be  carried  further.  (3)  Improved  appliances 
may  be  experimented  with  and  introduced  more  readily  than  by 
smaller  competing  companies  with  proportionately  less  capital. 
For  the  street  railway,  then,  as  well  as  for  the  businesses 
of  supplying  water,  gas,  or  electricity,  the  conclusion  seems  to 
be  justified  by  theory  and  confirmed  by  experience  that  mo- 
nopoly is  the  natural,  inevitable  and  economically  desirable 
form  of  organisat  on. 

§  255.  The  next  most  important  municipal  monopoly,  the 
telephone  business,  owes  its  form  of  organisation  to  somewhat 
different  circumstances.  Unlike  the  business  just  described 
it  is  not  subject  to  the  law  of  decreasing  expense.  On  the 
contrary  electrical  engineers  maintain,  and  with  apparent  rea- 
son, that  the  larger  the  number  of  subscribers  served  through 
one  exchange  the  larger  is  the  expense  per  subscriber  of  ren- 
dering the  service.  This  is  because  the  exchange  stations  must 
be  so  arranged  that  each  new  subscriber — or  pair  or  quartette 
of  subscribers  where  two  or  four  party  lines  are  used — may 
have  his  wire  connected  readily  by  each  of  the  many  operators 
required  in  a  large  office  with  that  of  any  other  subscriber. 
If  one  operator  is  able  to  attend  to  the  calls  of  fifty  sub- 
scribers and  the  office  serves  one  thousand,  this  necessitates 
twenty  different  terminals  at  the  exchange  for  each  wire.  If 
the  number  of  subscribers  doubles,  each  separate  wire  must  be 
let  in  at  forty  points.  If  five  thousand  subscribers  are  to  be 
served,  each  wire  must  have  one  hundred  distinct  terminals. 
In  this  way  the  expense  at  the  central  office  increases  by  multi- 


Advantages  of  Monopoly  451 

plication  rather  than  by  addition.  For  five  thousand  sub- 
scribers not  five  times,  but  twenty- five  times  as  many  connec- 
tions are  needed  as  for  one  thousand.  Xor  is  there  the  savinjj 
of  expense  outside  the  central  office  in  the  telephone  business 
that  is  to  be  found,  for  example,  in  connection  with  electric- 
lighting.  For  the  best  service  it  is  necessary  to  have  a  dis- 
tinct wire  for  each  new  subscriber.  Fair  service  can  be  given 
to  two  parties  on  the  same  line.  Four-party  lines  are  less  satis- 
factory. Lines  serving  more  than  four  have  been  found  to 
work  so  badly  that  they  are  now  little  used  in  cities.  Thus  as 
regards  outside  wiring  the  expense  grows  uniformly  with  the 
number  of  subscribers.  There  are,  of  course,  on  the  other 
hand,  economies  in  administration,  etc.,  which  result  from  an 
increase  in  the  number  of  subscribers  and  which  must  be  taken 
into  account.  On  the  whole  it  appears  to  be  true,  however, 
that  increasing  rather  than  diminishing  expense  is  the  law  of 
growth  in  the  telephone  business. 

Monopoly  results  in  this  business  from  the  fact  that  the 
larger  the  company  the  more  valuable  is  the  service  that  it  can 
render.  Each  new  subscriber  means  another  person  or  firm 
with  whom  other  subscribers  may  talk.  No  one  would  care 
very  much  for  a  telephone  if  it  enabled  him  to  talk  to  only  fifty 
people.  It  is  ten  times  as  valuable  when  it  enables  him  to  talk 
to  five  hundred.  If  it  enables  him  to  talk  at  will  with  five 
thousand  and  he  is  a  man  of  affairs  with  business  relations  with 
many  of  them,  it  becomes  well-nigh  indispensable. 

In  the  case  of  the  telephone  business  in  the  United  States  Advan- 
monopoly  organisation  was  the  original  form  because  of  the  \?^^oj?  i- 
patent.  Since  the  patent  expired  the  monopoly  continues  be- 
cause few  persons  care  to  leave  old  companies  with  their  large 
numbers  of  subscribers  to  throw  in  their  fortunes  with  new 
companies  with  small  numbers.  New  companies  do  start  up, 
of  course,  and  their  promoters,  and  others  who  hope  that  com- 
petition may  lower  rates,  become  subscribers.  If  the  old  com- 
pany feels  itself  threatened,  it  takes  up  the  gauntlet  and  enters 
upon  a  war  of  rates  which  soon  brings  the  weaker  concern  to 
terms.  The  consolidation  which  follows  is  not  only  good  as  a 
business  measure  for  those  directly  interested,  but  it  is  in 
harmony    with    the   best   interests   of   the    whole    community. 


Methods  of 
Increasing 
Telephone 
Rates 


Monopoly 

Profits  of 

Municipal 

Monopolies 

in  the 

United 

States 


452  Legal  and  Natural  Monopolies 

One  company  able  to  connect  any  subscriber  with  all  the  other 
persons  who  use  telephones  is  greatly  to  be  prefered  to  com- 
peting companies,  which  at  best  render  but  a  partial  service. 
The  higher  rates  which  follow  consolidation  are  not  socially 
beneficial,  but  the  remedy  for  high  rates  in  the  telephone  busi- 
ness, as  in  connection  with  other  natural  monopolies,  is  not 
competition,  but  legal  regulation. 

A  study  of  the  evolution  of  the  methods  of  charging  for  tele- 
phone service  throws  an  interesting  light  on  the  means  by 
which  the  companies  increase  their  charges  as  the  number  of 
their  subscribers  grows.  It  shows  in  the  first  place  that  the 
rates  per  message  are  higher  the  larger  the  size  of  the  city  in 
which  the  telephone  is  installed.  For  example,  in  the  pub- 
lished rates  for  the  winter  1901  to  1902  the  business  rate  for 
1500  messages  per  annum  on  a  one-party  line  was  $126  in  the 
Borough  of  Manhattan,  New  York  City,  $105  in  Boston,  and 
$87  in  Washington.  The  differences  are  thus  sufficient  to 
make  up  for  a  considerable  increase  in  the  expense  of  render- 
ing the  service  in  the  larger  places.  Nor  is  this  the  only  con- 
trast. In  the  larger  places  each  subscriber  is  apt  to  use  his 
telephone  more  than  in  the  smaller.  By  changing  from  the 
original  plan  of  charging  a  lump  sum  for  unlimited  service  to 
the  plan  now  almost  universal  of  charging  for  each  message, 
the  companies  have  increased  the  actual  returns  on  each  in- 
strument in  the  larger  places  very  considerably.  To  the  sub- 
scriber the  system  of  charging  for  each  message  seems  fair  and 
reasonable.  To  the  company  it  is  highly  advantageous  because 
it  causes  its  receipts  to  grow  in  increasing  proportion  as  the 
size  of  the  exchange  grows,  although  no  change  appears  to 
have  been  made  in  the  rates.  In  these  ways  the  telephone 
monopoly  adjusts  its  charges  to  the  value  of  the  service  it  ren- 
ders and  is  fully  compensated  for  any  increase  in  the  relative 
expense  of  supplying  telephone  facilities  to  an  increasing  num- 
ber of  patrons. 

§256.  For  the  reasons  explained  in  Section  114,  Chapter 
XL,  it  is  well-nigh  impossible  to  ascertain  the  relation  which 
the  earnings  of  a  business  organised  as  a  corporation  bear  to 
the  capital  actually  invested  in  it.  This  is  particularly  true  in 
the  case  of  municipal  monopolies  in  the  United  States,  as  they 


Monopoly  Profits  of  Street  Railways    453 

have  had  every  inckicement  and  facihty  to  conceal  their  profits 
by  means  of  overcapitahsation.  At  least  two  investigations  have, 
however,  been  made  which  throw  some  light  on  the  profitable- 
ness of  street-railway  enterprises. 

According  to  Professor  Spiers, ='=  who  made  a  careful  study 
of  the  street  railways  of  Philadelphia,  the  terms  on  which  the 
Union  Traction  Company,  organised  in  1895,  acquired  control 
of  all  of  the  street  railways  in  that  city  involved  the  payment 
by  it  of  5  per  cent,  interest  on  the  capital  actually  invested  in 
these  lines,  which  he  puts  at  $35,000,000,  and  in  addition  on 
$75,000,000  which  represents  the  value  of  the  franchise  or  of 
the  monopoly  which  the  subsidiary  companies  enjoyed.  In 
other  words  the  lease  calls  for  payments  aggregating  nearly  16 
per  cent,  on  the  capital  originally  invested.  If  instead  of  capital 
invested,  the  expense  of  reproducing  the  plants  were  taken 
as  the  criterion  of  the  proper  capitalisation,  the  showing  would 
be  even  more  favourable  from  the  point  of  view  of  monopoly 
profit.  Since  Professor  Spiers  made  his  inquiry  the  Union 
Traction  Company  has  itself  been  leased  by  a  new  company, 
organised  in  1902,  on  terms  which  insure  a  fair  monopoly 
profit  to  its  own  stockholders  over  and  above  that  promised  to 
the  subsidiary  companies.  An  even  more  thorough-going  in- 
quiry than  that  made  by  Professor  Spiers  in  Philadelphia  was 
made  a  few  years  later  by  a  committee  of  the  Civic  Federation 
in  Chicago.  According  to  the  Report  f  published  in  1901,  it 
was  found  that  nearly  $75,000,000  of  the  total  valuation  of 
$120,000,000  put  upon  the  street  railways  of  Chicago  in  July 
of  that  year,  represented  the  value  of  franchises,  or  of  the  mo- 
nopoly. The  net  earnings  of  the  companies  during  the  pre- 
ceding year  were  found  to  equal  14.6  per  cent,  on  the  original 
cost  of  the  plants,  rolling  stock,  etc.,  of  the  companies,  and 
20  per  cent,  on  the  cost  of  reproducing  these  plants  and  equip- 
ment. If  the  results  shown  by  these  two  investigations  may 
be  accepted  as  fairly  typical  of  the  profitableness  of  street  rail- 
way monopolies  generally,  and  there  is  no  reason  known  to  the 
author    for    supposing   that    conditions    in    Philadelphia    and 

*The  Street  Railway  System  of  Philadelphia,  p.  45. 
\The    Street    Railways   of  Chicago,   Reprinted  from   Municipal 
Affairs,  1901. 


Such 
Profits 
Now 
Capitalised 


The 

Solution 

of  the 

Municipal 

Monopoly 

Problem 


454  Legal  and  Natural  Monopolies 

Chicago  have  been  peculiarly  favourable  to  these  businesses, 
the  monopoly  profit  in  the  United  States  from  this  one  kind  of 
mimicipal  enterprise  must  aggregate  many  millions  each  year. 
According  to  a  report  of  the  Census  Bureau  799  of  the  817 
operating  street  and  electric  railways  which  did  business  in  the 
United  States  during  the  year  ending  June  30,  1902,  showed 
gross  earnings  equal  to  nearly  $250,000,000  and  net  earnings  of 
over  $105,000,000.  If  the  latter  bore  the  same  relation  to  the 
original  cost  of  plant  and  equipment  as  was  shown  for  Phila- 
delphia and  Chicago  (that  is,  14.6  to  16  per  cent.),  from  one- 
third  to  one-half  of  the  amount  ought  to  be  credited  to 
monopoly  profit. 

Quite  as  profitable  as  the  street-railway  business  have  been 
the  other  municipal  enterprises  described  as  natural  monopo- 
lies. If  the  monopoly  profits  from  all  of  these  businesses  in  the 
United  States  could  be  added  together,  it  would,  doubtless,  be 
found  that  they  amount  each  year  to  hundreds  of  millions  of 
dollars.  When  the  magnitude  of  these  profits  and  the  ease  w'ith 
which  they  may  be  capitalised  are  considered,  the  many  large 
private  fortunes  which  have  been  gained  by  bribing  State  legis- 
latures and  municipal  councils  to  dispose  of  franchises  for 
municipal  monopolies  for  a  mere  fraction  of  their  value  need 
excite  no  surprise.  Unfortunately,  the  stocks  and  bonds  of 
these  corporations  have  changed  hands  so  frequently  since  they 
were  originally  issued  that  the  men  who  have  reaped  the  largest 
returns  from  them  will  not  be  affected  by  the  tardy  measures 
that  may  now^  be  taken  to  secure  a  larger  share  of  the  benefit 
from  these  improvements  for  the  whole  people. 

§  257.  The  usual  first  impulse  of  the  student  of  the  munici- 
pal monopoly  problem  is  to  advocate  municipal  ownership  and 
operation  as  a  remedy,  and  there  is  much  to  be  urged  in  favour 
of  this  policy.  Monopolies  by  their  very  nature,  concerned 
with  services  in  which  the  whole  people  have  a  vital  interest, 
and  limited  in  the  scope  of  their  operations  to  the  particular 
towns  or  cities  which  they  serve,  these  businesses,  if  any,  it 
would  appear,  should  be  undertaken  by  municipal  govern- 
ments as  branches  of  the  public  administration.  Yet  the  objec- 
tions to  such  a  policy  for  the  cities  of  the  United  States  are  very 
strong.    The  arguments  on  either  side  must  be  weighed  in  coh- 


Arguments  Concerning  Public  Ownership   455 

nection  with  the  local  conditions  affecting  the  problem.    Only  in 
this  way  can  a  wise  decision  be  arrived  at. 

The  advocates  of  public  ownership  claim  the  following  advan-  Arguments 
tagcs  for  that  policy  :  ( i )  The  quality  of  the  service  rendered  o^.Q^rsli'lp 
by  a  branch  of  the  public  administration  is  likely  to  be  superior 
to  that  resulting  from  private  enterprise.  (2)  The  desire  for 
profit  being  removed,  the  charges  under  public  ownership 
will  be  adjusted  to  the  expense  of  rendering  the  service. 
P'rom  this  it  is  argued  that  charges  will  be  low  and  the 
widest  use  of  these  essentials  to  civilised  existence  will  be 
encouraged.  (3)  The  corrupting  influence  of  unscrupulous 
corporations  anxious  to  retain  or  to  have  extended  their 
franchise  privileges  will  be  removed  from  city  politics. 
(4)  Enlarging  the  scope  of  municipal  activities  will  enlist 
in  the  service  of  the  city  more  and  better  officials.  At  the  same 
time  it  will  increase  intelligent  interest  in  public  affairs  and  tend 
to  elevate  the  tone  of  political  life.  This  argument  assumes,  of 
course,  that  the  new  departments  of  the  municipal  government 
will  be  subjected  to  adequate  civil  service  regulations.  (5) 
Experience,  it  is  claimed,  haS  shown  that  nothing  short  of  public 
ownership  and  operation  of  these  businesses  can  secure  the 
degree  of  control  necessary  to  the  safeguarding  of  the  public 
interests. 

In  support  of  private  ownership  and  operation  the  following  Against 
considerations  are  urged  in  rebuttal :  ( i )  There  is  no  ground  Ownership 
for  assuming  that  the  service  rendered  by  the  municipal  govern- 
ment will  be  better  than  that  rendered  by  private  enterprise. 
On  the  contrary,  if  experience  is  to  be  relied  upon,  municipal 
governments  will  inflict  on  the  public  water,  gas,  etc.,  of  quali- 
ties that  would  not  be  tolerated  from  private  companies  organ- 
ised for  profit.  In  this  connection  the  improvement  in  the  qual- 
ity of  the  gas  that  resulted  from  the  lease  of  the  Philadelphia 
gas  plant  to  a  private  company  in  1898  is  cited.  (2)  The  inef- 
ficiency characteristic  of  municipal  activity  is  certain  to  show 
itself  in  high  expenses  of  operation.  These  higher  expenses 
may  necessitate  higher  charges  than  are  required  under  private 
management  to  afford  even  a  liberal  monopoly  profit.  (3)  At 
the  present  stage  of  political  development,  public  ownership 
and  operation  would  mean  simply  more  spoils  for  politicians. 


siderations 


456  Legal  and  Natural  Monopolies 

In  its  practical  effects  it  would  be  even  more  demoralising, 
politically,  than  the  corrupt  influence  of  private  corporations 
complained  of.  (4)  Private  ownership  is  more  progressive 
than  public  management.  In  this  connection  the  backward  con- 
dition of  the  municipal  street  railways  in  Great  Britain  is  cited. 
Though  temporary  advantages  might  result  from  public  owner- 
ship, it  is  argued  that  this  policy  would  sacrifice  the  public  inter- 
est in  the  long  run  by  checking  improvements.  (5)  It  is  denied 
that  adequate  legal  regulation  and  control  of  private  companies 
may  not  be  secured  when  the  community  is  really  alive  to  its 
own  interests.  Given  care  in  the  drafting  of  franchises  and 
insistence  that  these  shall  lapse  after  a  limited  time,  more  satis- 
factory results  may  be  realised,  it  is  claimed,  under  private  than 
under  public  ownership. 
Other  Con-  These  arguments,  it  will  be  seen,  are  partly  contradictory  and 
partly  related  to  unconnected  phases  of  the  problem ;  their  mere 
statement  emphasises  the  necessity  of  studying  local  conditions 
before  declaring  for  either  public  or  private  ownership.  In 
general,  it  is  probably  true  that  the  quality  of  the  service  can  be 
more  easily  controlled  under  public  than  under  private  manage- 
ment. Where  quality  of  service  is  all-important,  as  in  the  case 
of  the  water  supply,  this  furnishes  an  argument  for  the  former 
which  is  not  found,  for  example,  in  connection  with  the  tele- 
phone business.  On  the  other  hand,  where  the  methods  of  oper- 
ation are  in  process  of  rapid  improvement,  as  in  the  case  of  the 
telephone  business,  the  superior  progressiveness  of  private 
management  is  an  argument  on  that  side  that  is  not  found  in 
connection  with  the  business  of  supplying  water.  More  striking 
even  than  differences  between  the  different  businesses  are  the 
differences  between  the  political  preparedness  of  different  local- 
ities for  public  ownership.  In  certain  Massachusetts  towns, 
where  public  interest  is  highly  developed,  these  services  may  be 
and  have  been  undertaken  with  success.  In  other  towns  of  the 
same  size  in  other  sections  in  which  civic  self-consciousness  is 
just  beginning  to  manifest  itself,  attempts  to  perform  them 
through  the  town  governments  have  frequently  resulted  in 
failure. 

In  the  United  States,  up  to  the  present  time,  there  has  been  a 
marked  tendency  to  rely  upon  private  initiative  and  private 


The  Regulation  of  IVIunicipal  Monopolies     457 

enterprise  for  the  performance  of  these  services,  as  of  other  Situation 
services    of    an    industrial    character.      The    only    important  united 
exception  has  been  in  connection  with  the  business  of  supplying  States 
water  to  dwellers  in  towns  and  cities,  and  this  has  been  under- 
taken by  municipal  governments  less  because  of  any  distrust 
of  private  enterprise  in  this  field  than  because  good  water  has 
been  demanded  by  public  opinion  even  before  the  business  of 
supplying  it  gave  promise  of  proving  financially  successful. 
Municipal  water  plants  have  thus  been  comparable  with  the 
public  schools  in  that  they  have  served  to  supply  to  citizens 
often  at  less  than  cost  an  indispensable  condition  of  civilised 
life. 

Abroad,  and  especially  in  Germany,  the  preference  is  for  In  Europe 
the  public  ownership  and  operation  of  businesses  of  this  type. 
If  the  conditions  in  any  two  countries  were  sufficiently  simi- 
lar to  admit  of  comparison,  something  might  be  learned  by 
a  study  of  the  results  of  the  different  systems  in  different  lands, 
but,  unfortunately,  conditions  are  quite  unlike,  and  it  appears 
to  be  the  rule  that  those  who  apply  the  comparative  method 
to  this  problem  prove,  at  least  to  their  own  satisfaction,  just 
about  what  they  hoped  to  establish  when  they  began  their 
inquiry. 

If,  after  carefully  weighing  the  advantages  and  disadvantages  Methods  of 
of  municipal  ownership  and  operation,  a  community  decides  Munkfpal^ 
against  its  adoption,  the  alternative  is  by  no  means  the  unregu-  Monopolies 
lated  private  ownership  and  operation  encountered  in  most 
American  cities.  For  these  monopolies,  as  for  most  other  mo- 
nopolies, public  regulation  and  control  are  indispensable  to  the 
protection  of  the  public  interest.  To  determine  how  this  con- 
trol shall  be  exercised  is  a  problem  for  students  of  politics 
rather  than  economics,  but  the  following  general  principles  may 
be  suggested  :  ( i )  Such  businesses  are  natural  monopolies,  and 
nothing  is  to  be  gained  by  attempting  to  subject  them  to  the 
control  of  competition.  Exclusive  franchises  should  be  granted 
to  the  companies  entrusted  with  them.  (2)  These  franchises 
should  be  limited  to  a  definite  term  of  years.  The  term  must 
be  long  enough  to  encourage  that  investment  of  capital  that  is 
indispensable  to  efficient  service,  but  not  so  long  as  to  commit 
the  municipality  to  high  charges  when  changed  conditions  may 


Obstacles 

to 

Regulation 

in  the 

United 

States 


458         Legal  and  Natural  Monopolies 

make  lower  charges  profitable.  When  the  term  expires  the 
franchise  should  revert  to  the  municipality  and  it  should  have 
the  privilege  of  acquiring  for  itself  or  for  a  new  company,  at  a 
fair  valuation,  the  plant  and  equipment  of  the  old  company,  in 
case  its  charter  is  not  extended.  (3)  The  specifications  in  the 
charter  should  be  carefully  drawn  by  experts  so  as  to  insure 
at  least  at  the  outset,  the  best  quality  of  service  at  reasonable 
rates.  Charters  should  be  granted  like  other  Government  con- 
tracts, to  the  responsible  bidder  offering  the  most  favourable 
terms,  and  every  effort  should  be  made  to  advertise  widely  the 
provisions  of  the  charter,  and  to  prevent  collusion  between 
those  who  make  bids.  Space  will  not  permit  detailed  discussion 
or  defence  of  these  principles.  Although  stated  dogmatically, 
it  is  believed  that  they  represent  the  consensus  of  opinion 
among  students  of  public-service  corporations  who  recognise 
them  as  monopolies  and  yet  hesitate  to  advocate  for  them  mu- 
nicipal ownership. 

It  is  one  thing  to  lay  down  general  principles  and  quite 
another  to  carry  them  out  in  practice.  Only  of  late  years  has 
public  opinion  in  the  United  States  been  sufficiently  enlightened 
on  the  subject  of  municipal  monopolies  to  demand  any  sort  of 
adequate  control  and  regulation,  and  in  the  meantime  all  sorts 
of  abuses  have  been  permitted.  Perpetual  charters  have,  in 
many  cases,  been  granted  on  terms  which  permit  the  companies 
operating  under  them  to  disregard  completely  the  interests  of 
the  public.  Worse  than  all,  public-service  corporations  have 
come  to  exert  an  influence  on  political  parties,  through 
contributions  to  campaign  funds,  and  on  public  officials, 
through  powerful  and  unscrupulous  lobbies,  which  opposes 
a  serious  obstacle  to  eft"orts  to  control  them  through  polit- 
ical means.  Neglect  of  the  question  has  brought  about 
a  state  of  affairs  in  which  each  community  is  confronted 
by  a  special  problem,  modified  by  local  conditions,  and  must 
proceed  as  best  it  may  to  gain  the  mastery  over  the  cor- 
porations which  it  has  so  carelessly  created  and  allowed  to 
grow  to  overweening  power  and  influence.  In  dealing  with 
such  corporations  vested  interests  must  be  respected,  but  it  must 
not  be  forgotten  that  the  true  interest  of  the  whole  community 
is  more  important  than  that  of  a  particular  class  in  the  commu- 


Oljstacles  to  Regulation  459 

.  nity,  and  that  every  great  reform  of  necessity  inflicts  hardship 
upon  some  individuals.  It  is  the  duty  of  the  Government  to 
indemnify  those  who  are  injured  by  changes  which  are  dcHb- 
erately  undertaken  with  a  view  to  the  general  welfare,  but  it  is 
even  more  its  duty  to  make  such  changes.  The  reform  and  the 
desirability  of  the  reform  should  be  the  predominant  considera- 
tion, the  indemnification  an  incidental  accompaniment  neither 
to  be  exaggerated  nor  lost  sight  of.  Only  thus  can  progress 
towards  a  better  economic  and  political  organisation  of  society 
be  realised. 

REFERENCES  FOR   COLLATERAL   READING 

*  Le  Ros signal,  Mono-poYiQs  Past  and  Present  (bibliography);  Bemis, 
Municipal  Monopolies;  ^Darwin,  Municipal  Trade:  The  Advan- 
tages and  Disadvantages;  Spiers,  The  Street  Railway  System  of 
Philadelphia;  Report  on  the  Street  Railways  of  Chicago  (Municipal 
Affairs,  1901);  *Ely,  Problems  of  To-day,  Chaps.  XVII-XXI. 


CHAPTER  XXIV 


THE    RAILROAD  PROBLEM   IN    THE   UNITED   STATES 


National 
Monopolies 
of  Organ, 
isacion 


Circum- 
stances 
Making  the 
Railroad 
Business 
Monopo- 
listic 


§  258.  In  addition  to  the  municipal  monopolies  discussed  in 
the  last  chapter  there  are  businesses,  national  in  their  scope, 
which  should  also  be  classed  as  natural  monopohes  of  organi- 
sation. The  principal  are  the  telegraph,  the  long-distance  tele- 
phone, the  express,  and  the  steam-railway  business.  For  them, 
as  for  municipal  monopolies,  the  fixed  charges  are  a  chief  item 
of  expense.  Thus  a  telegraph  or  long-distance  telephone  com- 
pany, whether  large  or  small,  must  maintain  offices  in  and 
connecting  wires  between  the  principal  centres  of  population  or 
it  will  have  few  patrons.  In  comparison  with  the  cost  of  this 
necessary  equipment  the  expense  of  receiving  and  sending  mes- 
sages is  small.  It  follows  that  one  company  utilising  fully  its 
permanent  plant  can  conduct  all  of  the  business  more  econom- 
ically than  can  two  or  more  companies  needlessly  duplicating 
plants.  In  the  express  business  the  situation  is  similar  as 
regards  terminal  offices^  although  the  tendency  towards  combi- 
nation and  monopoly  is  less  marked  than  in  the  telegraph 
business,  because  the  actual  transportation  of  goods  is  effected 
by  railways  acting  as  agents.  These  circumstances  make 
monopoly  the  economical  form  of  organisation  for  each  one  of 
these  businesses.  That  no  one  of  them  has  yet  become  an  open 
monopoly  in  the  United  States  is  no  disproof  of  this  assertion. 
Public  hostility  to  monopoly  is  so  familiar  and  finds  such 
frequent  expression  in  the  decisions  of  the  courts,  that  business 
managers  are  careful  to  maintain  the  forms  of  competition 
even  after  the  substance  has  departed. 

§  259.  The  railway  business  exhibits  on  a  larger  scale  similar 
conditions  to  those  found  in  the  telegraph  business.  Roadbed 
and  terminal  facilities  represent  heavy  fixed  charges  that  must 
be  met,  no  matter  how  small  the  volume  of  business.  The  more 
fully  these  can  be  utilised  in  carrying  on  a  dense  traffic  the 

460 


Concentration  in  the  Railroad  Ikisiness      461 

smaller  will  be  the  expense  for  each  unit  of  traffic.  It  follows 
that  competition  for  business  between  long-distance  railways 
])artakes  of  the  same  life-and-dcath  character  that  was  described 
in  connection  with  street  railways.  When  one  road  gains  an 
advantage  and  begins  to  swell  its  profits  by  drawing  from  the 
profits  of  tlie  other  company,  the  situation  of  the  latter  is  very 
soon  rendered  desperate.  It  has  to  choose  between  combination 
with  the  other  road  on  its  own  terms  and  bankruptcy,  and  either 
choice,  as  American  experience  has  shown  over  and  over  again, 
means  in  the  end  combination  and  monopoly.  "A  railroad  is 
thus,"  to  quote  from  one  of  the  Reports  of  the  Interstate  Com- 
merce Commission,  "  essentially  a  monopoly.  This  is  literally 
true  as  to  all  local  points  upon  its  line  which  are  reached  by  it 
alone."  And  it  is  virtually  true,  as  the  report  adds  by  implica- 
tion, even  of  "  competitive  points,"  since  the  rates  at  such  points 
are  now  fixed  quite  generally  by  agreements  between  the  nom- 
inal competitors. 

The  progress  towards  concentration  of  railway  control  in  the  Progress 

United  States  has  been  marked  bv  three  distinct  stages.    In  the  ^°^^!!^I^!  „ 

^  L-oncentra- 

earlier  period   the  railways  were  looked   upon   as   beneficent  tion  in  the 
agencies  deserving  of  generous  public  support  and  of  all  con-  Business 
fidence.    Consolidations  were  regarded  with  indifference,  if  not  i"  the 
with  favour,  and  the  business  was  permitted  to  develop  in  the  states 
direction  of  monopoly  as  rapidly  as  its  nature  dictated.    About 
1870  it  began  to  be  appreciated  that  the  power  of  the  railways 
for  evil  was  quite  as  great  as  their  power  for  good.    The  cry  of 
extortionate  rates  and  monopoly  w^as  raised,  especially  in  the 
agricultural  States  of  the  middle  West,  and  an  era  of  drastic 
restrictive  legislation  was  inaugurated.     For  fifteen  years  the 
States  tried  to  deal  with  the  railway  problem  through  State 
laws  and  State  railway  commissions  armed  with  sweeping  pow- 
ers.    The  chief  result  of  their  eflforts  was  to  educate  public 
opinion  as  to  the  real  nature  of  the  railway  business  and  to 
prepare  the  way  for  Federal  interference.     Incidentally,  they 
forced  some  of  the  roads  into  bankruptcy,  and  compelled  all  of 
them  to  substitute  secret  for  open  methods  for  securing  the 
centralisation  of  control  that  continued  to  be  desirable.    In  this 
second  stage  secret  agreements  in  regard  to  rates  were  at  first 
substituted  for  competition.     The  ease  with  which  such  agree- 


462     The  Railroad  Problem  in  United  States 

ments  might  be  violated  suggested  that  to  them  be  added  defi- 
nite understandings  in  reference  to  the  division  of  the  traffic 
between  nominally  competing  roads.    The  entire  business  was 
"  pooled  "  and  then  divided  up  in  a  certain  fixed  proportion 
between  the  companies  entering  into  the  pool.    As  one  provi- 
sion of  these  pooling  agreements  guaranteed  to  each  road  its 
proportion  of  the  revenue  from  the  joint  traffic,  whether  it  car- 
ried its  exact  proportion  of  the  freight  and  passengers  or  not, 
the  inducement  to  rate-cutting  on  the  part  of  individual  roads 
was  removed,  and  the  stability  of  rate  agreements  was  propor- 
tionately strengthened.     Such  "  pools  "  became  very  common 
after  1880  and  served  to  create  combinations  and  monopolies 
on  behalf  of  the  roads  entering  into  them  as  effective,  while 
they  lasted,  as  though  the  roads  were  under  one  management. 
In  consequence,  they  became  special  objects  of  attack  on  the 
part  of  those  who  still  believed  in  competition  as  a  remedy  for 
excessive  railway  rates.     When  the  Interstate  Commerce  Act 
was  passed,  in  1887,  one  of  its  clauses  expressly  forbade  "  pool- 
ing."   The  Federal  Anti-Trust  Act  of  1890,  as  interpreted  by 
the  United  States  Supreme  Court,  went  even  further,  and  pro- 
hibited all  agreements  in  regard  to  rates.    The  result  of  these 
two  measures  has  been  to  compel  railroad  managers  during  the 
third  period  of  railroad  developm.ent  to  effect  out-and-out  com- 
binations of  competing  lines  as  a  means  to  securing  centralised 
control.     This  has  been  accomplished  either  through  the  pur- 
chase by  one  road  of  a  controlling  interest  in  the  stocks  of  its 
competitors  or  by  the  creation  of  a  new  corporation  to  acquire 
controlling  interests  in  the  stocks  of  two  or  more  rival  compa- 
nies, or  through  so-called  "  community  of  interests  "  arrange- 
ments, based  on  the  acquisition  by  one  company  of  enough  stock 
in  another  to  secure  representation  on  its  board  of  directors. 
In  one  or  another  of  these  different  ways  centralisation  of  con- 
trol has  been  extended  to  embrace  an  ever  larger  and  larger 
proportion    of    the    railway    mileage    of    the    United    States. 
This    is    indicated    for    the    last    decade    by    the    fact    that 
from    1890    to    1900    the    proportion    of    the    total    railway 
mileage   of   the   country   operated   by   companies    controlling 
1000   miles   of   line   and   upwards   increased    from   47.5    per 
cent,  to  60.8  per  cent.      Since   1900  progress  in  this  direc- 


Discrimination  between  Commodities     463 

tion  has  been  at  an  accelerated  rate.  In  the  year  1901  alone 
three  great  combinations  were  consummated :  the  Pennsyl- 
vania Railroad  acquired  a  large  interest  in  the  Baltimore  and 
Ohio,  the  Union  Pacific  acquired  control  of  the  Southern 
Pacific,  and  the  Northern  Securities  Company  combined  the 
Great  Northern  and  the  Northern  Pacific  just  after  the  latter 
had  acquired  the  Chicago,  Burlington,  and  Quincy.     The  last  • 

of  these  consolidations  may  be  declared  illegal  by  the  Supreme 
Court,  as  it  has  been  by  a  lower  tribunal,  but  it  is  the  cur- 
rent opinion  among  railroad  men  that  the  unified  control 
which  it  was  intended  to  perfect  will  be  continued.  The  move- 
ment towards  consolidation  has  already  gone  so  far  that  it  is 
considered  a  safe  prediction  in  railroad  circles  that  before  the 
end  of  the  present  decade  the  important  railway  mileage  of  the 
United  States  will  have  come  under  the  control  of  four  or  five 
giant  companies.  Whatever  may  be  the  fate  of  this  prophecy, 
it  may  be  asserted  with  confidence  that  competition  in  regard 
to  rates  has  already  given  way  on  all  the  more  important  rail- 
road systems  to  open  or  secret  traffic  agreements.  This  does 
not  mean  necessarily  that  rates  are  higher  than  formerly,  al- 
though the  Interstate  Commerce  Commission  secured  a  good 
deal  of  evidence  indicating  that  they  were  raised  by  joint  action 
on  the  part  of  the  railroads  of  the  country  from  January  i, 
1900,  to  January  T,  1902.  The  railroad  is  still  restrained  in  its 
rate-making  by  all  of  the  considerations  enumerated  in  the  sec- 
tion discussing  the  limitations  on  monopoly,  and  happily  the 
railroad  business  is  of  such  a  nature  that  low  rates  and  a  large 
volume  of  traffic  are  usually  much  more  profitable  than  high 
rates  and  a  smaller  amount  of  business.  It  does  mean,  however, 
that  the  time  has  passed  when  competition  between  railroads 
can  longer  be  relied  upon  to  control  the  policies  of  railway 
managers. 

§  260.  The  first  attacks  upon  the  railroads,  in  the  Granger  Discrimi- 
legislation  of  the  decade  from  1870  to  1880,  were  based  on  the  Raihvav' 
charge  that  their  rates  were  extortionate,  but  it  is  now  gcncr-  Rates:  Be- 
ally  recognised  that  an  even  more  serious  evil  in  connection  modities 
with  them  is  discrimination.  This  may  be  of  three  kinds :  First, 
freight  classifications  may  be  made  in  such  a  way  that  particu- 
lar commodities  are  discriminated  against.    For  example,  it  has 


464     The  Railroad  Problem  in  United  States 

recently  been  charged  against  the  railroads  carrying  wheat  from 
the  middle  West  to  the  sea-board  that  they  make  rates  on  wheat 
so  low  in  comparison  with  their  rates  on  flour  that  the  millers 
of  Minneapolis  and  Duluth  can  no  longer  produce  for  export. 
The  determination  of  the  rates  that  shall  be  charged  on  differ- 
ent commodities  presents  one  of  the  most  difficult  problems  in 
the  whole  range  of  railroad  practice.  In  general,  the  policy  of 
railroad  managers  is  so  to  classify  articles  that  each  will  pay 
as  high  a  rate  as  "  the  traffic  will  bear."  The  more  valuable  the 
commodity,  in  proportion  to  its  bulk,  the  higher,  ordinarily,  the 
rate  it  can  afford  to  pay.  On  this  ground  the  highest  rates 
apply  usually  to  costly  finished  commodities,  and  the  lowest 
to  staple  materials.  It  is  obvious  that  within  the  limits  of 
this  general  plan  there  is  wide  range  for  variation,  and  that 
the  railroad  manager  who  wishes  to  favour  the  development  of 
one  industry  at  the  expense  of  another,  or  of  one  locality  at  the 
expense  of  a  rival,  or  of  one  firm  in  opposition  to  its  competi- 
tors, may  do  so  in  many  cases  by  merely  changing  the  classifica- 
tion of  the  articles  to  be  affected. 
Between  More  serious,  because  more  far-reaching  in  its  consequences, 

is  the  second  form  of  discrimination — that  between  places. 
Under  present  conditions  no  community  lives  to  itself  alone. 
Most  communities  produce  chiefly  for  export  to  other  localities 
and  rely  on  other  localities  for  most  of  the  commodities  needed 
to  satisfy  home  wants.  As  a  rule,  the  railroad  is  the  agency 
through  which  the  exportation  of  surplus  products  and  the 
importation  of  needed  products  in  exchange  is  eft'ected.  It 
has  still  at  certain  points  competitors  in  the  public  highways  and 
in  canals  and  water  routes,  but  for  ninety  out  of  every  hundred 
communities  the  services  of  the  railroad  are  indispensable  to 
industrial  prosperity,  if  not  to  industrial  existence.  Under 
these  circumstances  the  power  of  railroads  to  stimulate  or 
retard  the  prosperity  of  centres  of  population  can  hardly  be 
exaggerated.  By  granting  low  rates  they  can  transform  even 
unpromising  sections  into  busy  seats  of  agriculture,  manufac- 
turing, or  even  mining.  High  rates  may  have  an  equally  dead- 
ening effect  upon  sections  that  were  previously  prosperous. 

In  general,  the  interest  of  the  railroad  is  served  by  encourag- 
ing the  growth  of  centres  of  population  where  the  natural  con- 


Discrimination  between  Persons        465 

cHtions  are  most  favourable,  but  it  often  happens  that  special 
reasons  lead  to  quite  a  different  policy.  One  such  reason  is  the 
necessity  of  sharing  traffic  with  other  transporting  agencies  at 
competitive  points.  If  liigh  rates  are  asked  at  such  points,  the 
temptation  to  break  traffic  agreements  in  order  to  obtain  a 
larger  share  of  the  business  is  too  strong  to  be  resisted.  Hence 
low  rates  usually  prevail  where  two  or  more  roads  serve  the 
same  community,  and  railroad  managers  are  only  too  apt  to 
charge  high  rates  at  intermediate  points.  Local  rates  were  so 
high  when  the  Interstate  Commerce  Act  was  passed  in  1887  that 
a  special  clause,  known  as  the  "  long  and  short  haul  provision," 
was  inserted  to  protect  local  shippers.  This  provides  that  the 
rates  between  intermediate  points  on  the  same  road  must  not 
exceed  rates  between  terminal  points.  Another  reason  for  dis- 
crimination between  places  is  the  special  interest  which  the  rail- 
road or  its  managers  may  have  in  the  development  of  particular 
localities.  It  has  not  infrequently  happened  that  railroad  man- 
agers who  have  acquired  large  tracts  of  land  in  particular  sec- 
tions have  deliberately  lowered  freight  rates  for  such  sections 
in  order  to  attract  settlers  to  them  and  in  this  way  enhance 
the  value  of  their  holdings.  The  demoralising  consequences  of 
such  unjust  practices  have  been  experienced  too  frequently  in 
all  parts  of  the  United  States  to  require  emphasis. 

§261.  The  third  and  worst  form  of  rate  discrimination  is  Between 

.     .  Persons 

that  between  persons.     The  motive  for  such  discrimination  is 

inherent  in  the  nature  of  the  railway  business.  Unlike  the 
farmer  or  the  manufacturer,  the  railroad  manager  cannot  calcu- 
late what  it  costs  him  to  carry  additional  freight  or  additional 
passengers.  His  fixed  charges  must  be  met  in  any  case. 
The  additional  expense  connected  with  additional  traffic  is  so 
small  that  almost  any  rate  for  the  particular  traffic  will  prove 
profitable  so  long  as  the  open  rate  for  other  traffic  is  maintained. 
"  Generally  speaking,"  to  quote  again  the  language  of  the 
Interstate  Commerce  Commission,  "  he  feels  that  he  must  have 
the  traffic.  His  road  is  there,  and  it  can  be  used  for  nothing  else. 
The  property  with  which  he  stands  charged  may  be  seriously 
injured  without  that  particular  traffic,  and  he  must  get  it  when 
it  is  moving.  He  cannot  lie  idle  for  better  prices  or  more  pros- 
perous conditions.     There  is,  therefore,  a  constant  temptation 


Reasons 
for 

Discrimi- 
nations 


466     The  Railroad  Problem  in  United  States 

to  obtain  it  at  any  cost.  Now,  the  rates  between  two  competi- 
tive points  have  been  published.  The  manager  of  one  road  finds 
that  business  has  abandoned  his  Hne,  and  he  beUeves  that  it  is 
moving  by  a  rival  route.  He  can  draw  but  one  inference,  and 
that  is,  that  his  competitor  has  secretly  reduced  the  rate.  Under 
these  circumstances  what  shall  he  do?  Shall  he  maintain  the 
published  rate  and  thereby  abandon  business  ?  But  that  means 
disaster  to  his  road,  the  loss  of  his  reputation  as  a  manager,  and 
ultimately  of  his  employment.  What  most  managers  actually 
do  is  to  get  the  business  by  making  whatever  rate  is  neces- 
sary.  * 

It  may  be  said  that  railroad  managers  have  no  more  reason 
to  deal  unequally  with  different  customers  than  managers  of 
other  businesses ;  but  this  is,  imfortunately,  not  the  case.  A 
situation  which  frequently  confronts  a  manager  was  described 
by  Mr.  C.  M.  Wicker  of  Chicago,  in  testimony  given  before  an 
investigating  committee  of  the  Illinois  legislature.  He  said : 
"  Here  is  quite  a  grain  point  in  Iowa,  where  there  are  five  or 
six  elevators.  As  a  railroad  man  I  would  try  and  hold  all 
these  dealers  on  a  level  keel,  and  give  them  all  the  same 
traffic  rate.  But  suppose  there  was  a  road  five  or  six  miles 
across  the  country  and  all  these  dealers  should  begin  to  drop 
in  on  me  every  day  or  two  and  tell  me  that  the  road  across  the 
country  was  reaching  within  a  mile  or  two  of  our  station  and 
drawing  to  itself  all  the  grain.  You  might  say  that  it  would 
be  the  right  and  just  thing  to  do  to  give  all  the  five  or  six 
dealers  at  the  station  a  special  rate  to  meet  that  competition 
through  the  country.  But,  as  a  railroad  man,  I  can  accomplish 
the  purpose  better  by  picking  out  one  good,  smart,  live  man, 
and,  giving  him  a  concession  of  three  or  four  cents  a  bushel, 
let  him  go  there  and  scoop  the  business.  I  would  get  the  ton- 
nage, and  that  is  what  I  want,  but  if  I  give  it  to  five  it  is 
known  in  a  very  short  time."  For  such  reasons  railroad  man- 
agers usually  prefer  to  deal  with  one  rather  than  wuth  a 
number  of  shippers.  The  discriminating  rate  must  be  kept 
secret  or  other  shippers  will  be  dissatisfied,  and  secrecy  is  only 
possible  where  knowledge  of  the  transaction  is  confined  to  the 
manager  and  the  favoured  shipper.  Nor  are  shippers  them- 
*  Twelfth  Aftnual  Report  (1S9S),  p.  18. 


The  South  Improvement  Ccjmpany      467 

selves  entirely  passive  in  connection  with  discriminations. 
Business  managers  controlling  large  amounts  of  traffic  at  com- 
petitive points  are  well  versed  in  the  process  of  playing  one 
road  off  against  another.  It  is  even  alleged  that  in  some  cases 
men  have  withdrawn  their  entire  business  from  one  road  in 
order  to  convince  its  traffic  agent  that  they  were  getting  dis- 
criminating rates  from  another,  and  in  this  way  persuade  him 
to  grant  even  lower  rates,  when,  as  a  matter  of  fact,  no  dis- 
crimination had  existed. 

The  reports  of  the  investigating  committees  and  commis-  Case  of 
sions  which  have  inquired  into  the  practices  of  railroads  in  the  i/,fprove 
United  States  are  full  of  evidence  as  to  the  extent  to  which  rnent 
discriminations  have  been  practised.  Some  of  the  most  ^^P^^Y 
flagrant  cases  have  been  brought  to  light  in  connection  with 
investigations  of  the  trusts.  In  one  case  the  South  Im- 
provement Company,  which  was  organised  by  the  original  pro- 
moters of  the  Standard  Oil  Company,  entered  into  a  formal 
contract  with  a  railroad  under  which  the  latter  was  to  charge 
it  ten  cents  a  barrel  for  transporting  its  oil,  and  other  com- 
panies thirty-five  cents  a  barrel  for  the  same  service,  with  the 
proviso  that  twenty-five  cents  of  this  excessive  charge  should 
be  paid  to  the  South  Improvement  Company  itself.  That 
such  an  arrangement  would  be  fatal  to  competitors  who  were 
compelled  to  ship  over  a  railroad  promising  such  discrimina- 
tion is  obvious.  There  is  abundant  evidence  that  similar,  if  less 
favourable,  traffic  arrangements  had  much  to  do  with  the  early 
success  of  the  Standard  Oil  Company  in  crushing  its  com- 
petitors or  compelling  them  to  sell  out  to  it  on  terms  favourable 
to  itself.  In  the  judgment  of  the  Interstate  Commerce  Com- 
mission, expressed  as  recently  as  1898,  "  there  is  probably  no 
one  thing  to-day  which  does  so  much  to  force  out  the  small 
operator  and  to  build  up  those  monopolies  against  w'hich  law 
and  public  opinion  alike  beat  in  vain,  as  discrimination  in 
freight  rates." 

§  262.  That  tlie  businesses  classified  as  national  monopolies  Profits 

of  organisation  have  given  rise  and  do  give  rise  to  verv  large  ^^"^  t^®, 

'      t  _       .  ,,  ,  ,     ,  ,  ' ,       \      Railroad 

monopoly  profits  is  well  understood,  but  the  reasons  already  Business 

explained  make  the  exact  measurement  of  these  profits  out  of  |^  V^^ 

the  question.     They  are  peculiarly  sensitive  to  public  opinion  states 


468     The  Railroad  Problem  in  United  States 

and  have  been  careful  to  so  adjust  their  nominal  capitalisations 
to  their  earning  powers  that  the  interest  and  dividends  that 
they  pay  to  investors  seem,  when  the  risks  connected  with  such 
enterprises  are  considered,  scarcely  a  fair  and  certainly  not  an 
excessive  return.  Thus  the  aggregate  capitalisation  of  the 
railroads  of  the  United  States  was  returned  to  the  Interstate 
Commerce  Commission  on  June  30,  1900,  at  $1^1,490,000,000 
divided  about  equally  between  bonds  and  stock.  During  the 
preceding  year  interest  was  paid  on  95  per  cent,  of  the  bonds, 
but  on  only  46  per  cent,  of  the  stock,  and  the  average  return 
on  bonds  and  stock  together  was  only  3.4  per  cent.  On  only 
3  per  cent,  of  the  stock  were  dividends  in  excess  of  8  per  cent, 
paid,  while  on  ^2  per  cent,  of  the  outstanding  bonds  the  rate  of 
interest  was  under  6  per  cent.  Equally  modest  returns  are 
shown  for  most  of  the  telegraph,  long-distance  telephone,  and 
express  businesses  of  the  country.  To  get  behind  figures  like 
the  above  to  a  knowledge  of  the  relation  which  earnings  bear 
to  actual  investment  in  these  enterprises  is  a  task  that  has  only 
been  undertaken  in  a  few  instances.  It  is  undoubtedly  true 
that  in  many  cases  these  monopolistic  businesses  have  proved 
unprofitable.  For  them  as  for  other  monopolies,  monopoly 
profit  is  a  possibility  rather  than  a  necessity.  No  matter  how 
complete  the  monopoly  which  a  railroad  may  enjoy  of  the 
traffic  of  a  given  section,  it  cannot  make  this  the  source  of 
monopoly  profit  if  the  section  happens  to  be  a  desert  and  its 
traffic  only  sufficient  to  employ  one  train  a  week.  It  is  equally 
incontestable  that  many  of  these  enterprises  have  proved  enor- 
mously profitable.  The  railroads  in  the  older  and  more  pros- 
perous portions  of  the  United  States  have  earned  immense 
fortunes  for  hundreds  of  different  investors  and  speculators 
and  promise  to  earn  equally  large  fortunes  for  as  many  more 
before  the  rates  are  adequately  controlled  in  the  public 
interest.  The  enormous  earnings  which  the  railroads  alone  are 
capable  of  making  are  illustrated  by  comparing  the  figures  for 
recent  years.  The  year  ending  June  30,  1900,  was  considered 
a  year  of  great  prosperity  in  the  railroad  world,  and  yet  the 
earnings  of  the  railroads  of  the  country  increased  in  the  follow- 
ing year,  according  to  the  statistician  of  the  Interstate  Com- 
merce Commission,  about  $102,000,000  as  regards  gross,  and 


National  Rci^mlation  469 

$33,000,000  as  regards  net.  The  earnings  of  the  roads  in  1902 
were  higher  than  those  of  1901,  acconhng  to  the  same  author- 
ity, by  about  $147,000,000  as  regards  gross,  and  $62,000,000 
as  regards  net.  And  these  additional  earnings  were  reahsed 
for  the  most  part  not  by  roads  which  were  not  paying  a  fair 
return  on  capital  invested  in  1900,  or  by  new  roads,  but  by 
those  which  even  in  that  year  were  realising  large  monopoly 
profits.  If  to  the  monopoly  profits  of  the  railroads  we  add 
those  of  the  other  national  monopolies  referred  to,  we  may 
assert  without  exaggeration  that  the  aggregate  return  from 
these  sources  adds  its  hundreds  of  millions  of  dollars  to  the 
annual  income  in  the  United  States  that  is  properly  character- 
ised as  monopoly  profit. 

§  263.  Efforts  on  the  part  of  the  State  legislatures  to  regu-  National 
late  railroads  in  the  United  States  have  encountered  an  insur-  Regulation 
mountable  obstacle  in  the  clause  in  the  Federal  Constitution 
assigning  control  over  interstate  commerce  tO'  Congress.  Their 
power  to  regulate  is  limited  to  the  aft'airs  of  State  roads,  and 
these  now  play  a  very  minor  part  in  the  railroad  business  of 
the  country. 

Congress  did  not  bestir  itself  with  a  view  to  regulating  rail-  Tj^g 

roads  engaged  in  interstate  commerce  until  188=5.     In  that  year  Interstate 
,0  -1  -1  •  .         .        .  ,       Commerce 

the  Senate  appomted  a  special  committee  to  inquire  into  the  Act 

evils  of  railroad  management.  Its  report,  submitted  the  fol- 
lowing year,  furnished  the  basis  for  the  Interstate  Commerce 
Act  of  1887.  The  principal  provisions  of  this  important  meas- 
ure were  the  following :  ( i )  discriminations  between  persons, 
places,  and  commodities  were  prohibited,  and  railroad  officials 
granting  discriminating  rates  were  made  liable  to  fine  and  im- 
prisonment;  (2)  railway  rates  for  interstate  traffic  were  re- 
quired to  be  just  and  reasonable,  and  any  rate  not  just  and 
reasonable  was  declared  to  be  unlawful,  and  valid  ground  for 
a  suit  for  damages  by  the  injured  party;  (3)  railroads  were 
required  to  publish  their  rates  and  to  change  them  only  on  pub- 
lie  notice;  (4)  they  were  prohibited  from  charging  a  higher 
rate  for  a  short  haul  than  for  a  long  haul  over  the  same  line 
and  under  similar  circumstances,  unless  authorised  to  do  so  by 
the  Interstate  Commerce  Commission;  (5)  pooling  contracts 
between  railroads  were  prohibited.     Tiic  Act  also  created  an 


Defects  in 
the  Act 


Its  Inter- 
pretation 
by  the 
Courts 


470     The  Railroad  Problem  in  United  States 

Interstate  Commerce  Commission  to  consist  of  five  members 
and  to  be  responsible  for  its  enforcement  and  the  investigation 
of  cases  of  alleged  violation.  The  powers  of  the  Commission 
were  extended  by  an  amending  Act  passed  in  February,  189 1. 
It  may  now  subpoena  witnesses  and  require  testimony,  even 
though  such  testimony  is  incriminating  to  the  witness  giving 
it,  and  call  upon  assistant  attorneys  general  to  bring  suit  in 
the  name  of  the  United  States  against  offending  railroads 
and  their  officials. 

Notwithstanding  its  large  powers  the  Interstate  Commerce 
Commission  has  failed  to  enforce  some  of  the  essential  pro- 
visions of  the  Interstate  Commerce  Act.  This  has  been  due 
chiefly  to  defects  in  the  Act  itself  of  which  the  most  serious  is 
the  attempt  to  prohibit,  at  one  and  the  same  time,  discrimina- 
tions and  pooling.  Experience  has  shown  conclusively  that 
competition  between  railroads  involves  discrimination.  Com- 
petition in  the  railroad  business  means  in  practice  making 
special  rates  to  attract  special  traffic.  But  experience  has 
shown  with  equal  conclusiveness  that  agreements  between  rail- 
roads designed  to  put  an  end  to  competition  can  only  be  main- 
tained when  supplemented  by  pooling  contracts.  So  long  as 
the  proportion  of  freight  which  each  road  is  to  secure  depends 
upon  its  activity,  the  self-interest  of  railroad  managers,  or  their 
credulity  acted  upon  by  the  misrepresentations  of  unscrupu- 
lous shippers,  will  make  discrimination  in  rates  almost  inevi- 
table. The  law  undertakes  to  enforce  two  lines  of  policy  which 
will  not  run  together  so  long  as  different  railroads  act  as  car- 
riers for  the  same  territory. 

Other  defects  in  the  act  have  been  brought  to  light  through 
the  interpretation  given  to  it  by  the  Supreme  Court.  That 
tribunal  has  decided  that  a  railroad  may  properly  charge  less 
for  transporting  imported  commodities  from  a  port  of  entry  to 
their  destination  within  the  country  than  is  charged  for  do- 
mestic products  of  the  same  kind,  over  the  same  route.  This 
decision  has  deprived  the  Commission  of  much  of  the  influence 
it  might  have  had  in  adjusting  freight  rates  on  imported  goods 
to  those  on  domestic  products.  The  Court  has  further  held  that 
while  the  Commission  may  declare  any  given  rate  unlawful  be- 
cause neither  just  nor  reasonable,  it  may  not  prescribe  a  substi- 


Amendment  of  1903  471 

tute  rate  which  is  just  and  reasonable  and  tlierefore  lawfuh 
Under  this  ruling  the  Commission's  power  is  Hmited  to  con- 
demning prevaiHng  rates.  While  in  practice  this  may  enable  it 
by  repeated  rulings  to  establish  the  rate  it  considers  fair,  it  has 
caused  needless  friction  and  delay.  Even  more  serious  has 
been  the  repeated  failure  of  the  Supreme  Court  to  sustain  the 
Commission  in  its  decisions  in  reference  to  rates.  This  has 
been  due  in  part  to  the  policy  of  attorneys  representing  the 
railroads  of  withholding  important  evidence  until  appeal  has 
been  taken  to  the  United  States  courts,  for  the  deliberate  pur- 
pose of  undermining  the  authority  of  the  Commission. 

An  important  amendment  to  the  Act  was  added  in  February,  Amend- 
1903,  by  which  railway  corporations  are  themselves  made  liable  ^^^^  ^^ 
to  heavy  fines  for  violations  of  the  Act  by  any  of  their  officers 
or  agents  and  the  latter  are  relieved  from  the  punishment  of 
imprisonment  provided  by  the  original  Act,  and  by  which  the 
Interstate  Commerce  Commission  is  authorised  to  secure  in- 
junctions restraining  railroad  companies  believed  to  be  violat- 
ing the  Act  from  persisting  in  such  violations.  The  advantage 
of  the  injunction  process  is  that  it  renders  any  person  disre- 
garding it  liable  to  summary  punishment  for  contempt  of  court 
without  the  protection  afforded  by  the  ordinary  rules  of  evi- 
dence. That  these  changes  in  the  law  will  materially  assist  the 
Commission  in  its  efforts  to  enforce  the  Act  cannot  be  doubted, 
but  it  is  the  opinion  of  students  of  the  railroad  problem  that 
still  other  amendments  will  be  necessary  to  insure  that  degree 
of  regulation  of  the  business  of  the  railroads  of  the  country 
which  the  public  interest  requires. 

§  264.  Many  thoughtful  persons,  despairing  of  any  solution  Arguments 

of  the  problem  presented  by  natural  monopolies  along  the  line  ''-"",  ^"'^ 

of  Federal  regulation,  advocate  national  ownership  and  opera-  National 

tion  of  these  businesses  with  the  same  confidence  that  thev  ad-  ^^P^ration 

-  01  h-xpress 

vocate  municipal  ownership  and  operation  as  a  remedy  for  and 
municipal  monopolies.  The  extension  of  the  postal  business  of  Justnesses 
the  United  States  to  include  the  express  and  telegraph  business 
is  so  widely  advocated  that  it  may  be  said  to  be  a  living  issue. 
Hardly  a  session  of  Congress  passes  that  bills  are  not  intro- 
duced having  this  extension  in  view  and  one  or  other  of  these 
steps  has  been  advocated  with  great  regularity  by  recent  post- 


Arguments 

for 

National 

Ownership 

and 

Operation 

of  the 

Railroads 


472     The  Railroad  Problem  in  United  States 

masters  general  of  the  United  States.  If  both  of  these  busi- 
nesses were  not  very  well  managed  already  and  if  their  charges 
were  not  kept  down  by  the  competition  of  other  agencies  for 
communication  and  transportation,  there  is  reason  to  think  that 
the  advocates  of  public  ownership  would  carry  their  point. 
The  arguments  on  either  side  are  so  similar  to  those  reviewed 
in  connection  with  the  discussion  of  municipal  ownership  that 
it  will  be  necessary  only  to  summarise  them.  Few  question  the 
ability  of  the  Government  to  manage  these  businesses  efifi- 
ciently.  Those  opposed  to  national  ownership  maintain,  how- 
ever, that  they  are  already  managed  as  well  as  they  could  be  by 
the  Government  and  that  rates  are  as  low  as  the  Government 
could  afford  to  make  them.*  They  assert  further  that  the  threat 
of  government  purchase  and  operation  is  an  effective  check  on 
any  tendency  these  businesses  may  have  to  use  their  monopoly 
power  to  the  disadvantage  of  the  public.  In  support  of  national 
ownership  it  is  urged  that  the  Government  already  maintains  in 
its  postal  system  most  of  the  machinery  necessary  to  the  con- 
duct of  these  kindred  businesses  and  that  for  this  reason  its 
expenses  of  operation  would  be  considerably  less  than  they 
are  to  the  private  companies  which  now  conduct  them. 
Under  these  circumstances  lower  rates  might  be  charged. 
Moreover  it  is  insisted  that  the  present  method  of  arranging 
express  and  telegraph  charges  does  not  serve  the  general 
interest  as  well  as  one  similar  to  that  of  the  post-office  and  that 
government  ownership  is  the  only  method  by  which  the  point 
of  view  of  the  managers  of  these  important  businesses  can  be 
changed  from  that  of  greatest  possible  profit  to  that  of  greatest 
possible  service. 

The  national  ownership  and  operation  of  the  railroads  of  the 
United  States  are  a  much  more  ambitious  project.  In  addition 
to  the  vastly  larger  initial  outlay  that  such  a  policy  would  en- 
tail and  the  immense  increase  of  public  officials  that  would  re- 
sult from  it,  there  are  complexities  in  the  railway  business  itself 
that  make  the  success  of  government  operation  at  least  prob- 
lematical.    The  principal  arguments  on  which  defenders  of  the 

*  The  untested  possibilities  of  wireless  telegraphy  makes  the  present 
a  decidedly  unfavourable  time  for  the  government  to  venture  into  the 
telegraph  business. 


Arguments  again:^t  the  Policy  473 

government  ownership  programme  rely  may  be  summarised  as 
follows:  (i)  Discriminations  would  cease  and  m  their  place 
general  tariffs,  published  in  advance,  and  applying  to  all  ship- 
pers alike,  would  prevail.  (2)  Rates  might  be  lower,  as  the 
roads  would  have  to  earn  only  the  two  per  cent,  or  so  on  the 
bonds  which  the  Government  might  issue  in  exchange  for  them 
at  the  time  of  purchase,  in  place  of  the  higher  interest  and  divi- 
dends now  demanded  by  stockholders.  (3)  In  the  determina- 
tion of  rates  broader  principles  would  be  considered  than  those 
on  which  railway  managers  base  their  decisions.  The  railroads 
would  become  a  great  engine  for  the  promotion  of  industrial 
and  social  progress.  (4)  The  corrupting  influence  of  private 
railway  corporations  would  be  removed  from  political  life.  (5) 
Such  an  enlargement  of  the  field  of  government  ser\'ice  would 
alter  the  feeling  which  the  average  American  entertains  for 
holders  of  public  office.  A  new  type  would  be  drawn  into  the 
public  service  and  the  whole  plane  of  official  life  would  be 
raised  until  the  preference  would  be  for  it,  as  has  long  been  the 
case  in  Gcmiany,  instead  of  for  private  activity. 

To  these  optimistic  anticipations  defenders  of  private  enter-  Arguments 
prise  in  the  field  of  railway  transportation  oppose  the  following  f^^'?fV 
counter-arguments :  ( i )  Rates  would  become  rigid  and  instead 
of  adapting  themselves  readily  to  changing  business  condi- 
tions, as  at  present,  would  force  business  to  adapt  itself  to 
them,  with  industrial  lethargy  and  stagnation  as  a  result.  (2) 
Loss  of  efficiency  in  organisation  and  the  methods  of  operation 
would  prevent  any  lowering  of  rates  under  government  man- 
agement, at  the  same  time  that  it  would  be  likely  to  cause  de- 
terioration as  regards  quickness  and  convenience  of  service. 
(3)  Substituting  for  present  business  principles  vague  rules  in 
regard  to  social  expediency,  as  guides  in  the  determination  of 
rates,  would  cause  confusion  without  really  promoting  the  ends 
sought.  The  question  as  to  what  constitutes  just  rates  would 
become  the  favorite  theme  of  demagogues,  and  even  if  not 
allowed  to  influence  the  rates  actually  charged,  the  latter  would 
stir  up  public  opinion  against  the  Government  in  a  wav  that 
must  be  detrimental  to  the  public  service.  (4)  The  decision 
of  rate  questions  as  they  affect  different  sections  and  of  ques- 
tions connected  with  railroad  extensions  would  inevitablv  cet 


Other  Con- 
siderations 


Need  of 
Reform  in 
Interstate 
Commerce 
Act 


474     The  Railroad  Problem  in  United  States 

into  politics,  and  injustices  even  more  intolerable  than  those 
now  committed  by  the  privately  owned  railroads  would  be 
practised  for  the  sake  of  party  advantage.  (5)  Far  from  rais- 
ing the  plane  of  public  service,  adding  so  enormously  to  the 
spoils  of  each  national  election  would  confirm  the  dominance 
of  the  corrupt  party  machine  and  party  boss. 

In  addition  to  these  partly  theoretical  and  hypothetical  ob- 
jections, the  opponents  of  national  ownership  emphasise  prac- 
tical difficulties.  European  experience  is  discredited  on  the 
ground  that  no  European  coimtry  requires  more  than  a  frac- 
tion of  the  railway  mileage  needed  by  the  United  States.  The 
enormous  cost  of  acquiring  the  present  lines  and  the  difficulty 
of  deciding  where  new  lines  ought  to  be  built  are  urged. 
Finally  the  whole  proposal  is  characterised  as  a  leap  in  the 
dark,  when  only  the  first  steps  have  as  yet  been  taken  towards 
trying  to  regulate  the  railway  business  through  public  commis- 
sions. The  last  consideration  seems  to  merit  most  attention 
and  is  likely  to  postpone  any  experiments  along  the  line  of 
national  ownership  until  the  Interstate  Commerce  Commission 
itself  admits  its  inability  to  regulate  the  railways  and  demands 
the  more  radical  remedy. 

§  265.  That  the  Interstate  Commerce  Act  is  defective  is  con- 
ceded by  all  the  various  interests  which  that  measure  affects. 
Railroad  managers  criticise  its  prohibition  of  pooling.  Ship- 
pers urge  that  if  competition  cannot  be  relied  upon,  the  powers 
of  the  Commission  must  be  increased  to  a  point  that  will  enable 
it  to  regulate  rates.  Students  of  the  railroad  problem,  mean- 
time, desire  that  fuller  powers  may  be  given  the  Commission 
in  connection  with  the  collection  and  publication  of  informa- 
tion about  the  railroad  business  of  the  country.  These  de- 
mands and  others  have  been  repeated  year  after  year  in  the 
reports  of  the  Commission  itself  and  the  arguments  on  either 
side  have  been  clearly  stated  and  exhaustively  discussed.  In 
its  Report  for  1895  the  Commission  enumerated  the  amend- 
ments which  in  its  judgment  were  needed  to  make  the  evident 
intent  of  the  Interstate  Commerce  law  effective.  Some  of 
these  were  included  in  the  amending  Act  of  1903,  but  others 
are  still  lacking. 

The  changes  most  urgently  required  are  believed  to  be  the 


Changes  in  Interstate  Commerce  Act       475 

following:  (i)  The  Commission  should  be  given  the  power  not  Changes 
only  to  declare  existing  rates  unlawful,  when  comjjlaint  of  such  j^gnd'^dby 
rates  is  made,  and  "  after  due  investigation  and  inquiry,  upon  the  Corn- 
notice  to  carriers,  full  opportunity  having  been  given  for  them  "^'^^•'^'^ 
to  be  heard,"  but  also  to  prescribe  the  rates  that  would  be  law- 
ful under  the  circumstances  and  to  make  its  decisions  binding 
upon  the  carriers  until  disallowed  by  the  United  States  courts. 
(2)  It  should  have  control  over  the  freight  classifications 
adopted  by  the  railroads,  since,  as  already  explained,  changes 
in  classification  are  a  ready  means  of  changing  rates.  (3)  The 
prohibition  against  pooling  contracts  between  railroads  should 
be  repealed.  This  prohibition  rests  on  the  erroneous  theory 
that  competition  is  desirable  in  the  railroad  business.  The 
decision  to  regulate  rates  through  a  public  commission  is  m- 
consistent  with  the  policy  of  relying  on  competition.  Given 
a  commission  with  adequate  power  over  rates,  monopoly  in 
the  railroad  business  ceases  to  be  a  danger  and  becomes  an  ob- 
ject to  be  desired  in  the  interest  both  of  the  railroads  and  the 
public.  (4)  In  reviewing  the  decisions  of  the  Commission, 
the  Federal  courts  should  be  limited  to  the  proceedings  before 
that  body  and  should  not  permit  railroad  attorneys  to  bring 
forward  as  evidence  testimony  and  arguments,  which,  if  perti- 
nent at  all,  should  have  been  brought  forward  during  the  in- 
vestigation before  the  Commission.  Only  in  this  way  can  the 
dignity  of  the  Commission  be  upheld.  These  four  amend- 
ments would  give  the  Commission  power  really  to  control  and 
regulate  in  the  public  interest  the  railroads  of  the  United 
States.  Their  adoption  would  soon  determine  whether  gov- 
ernment regulation  is  a  satisfactory  solution  of  the  railroad 
problem.  Then,  to  repeat  the  words  of  Judge  Knapp,  Chair- 
man of  the  Interstate  Commerce  Commission.  "  if  regulation 
fails,  public  ownership  will  be  the  next  and  early  resort." 

REFERENCES  FOR   COLLATERAL   READING 

♦Reports  of  the  Interstate  Commerce  Commission;  Report  of  the 
United  States  Industrial  Commission,  Vols.  IV..  IX.  and*  XIX.; 
Hadlty,  Railroad  Transportation;  Sfukft^y,  The  Railway  Problem; 
Lewis,  National  Consolidation  of  the  Railways  of  the  United  States; 
Dixon,  State  Railroad  Control;    '*  Johtison,  Railway  Finance. 


CHAPTER   XXV 

CAPITALISTIC     MONOPOLIES,    OR     TRUSTS,    IN    THE 

UNITED   STATES 


Capitalistic 
Monopolies 
or  Trusts 


Motives 
for  Orp^ani- 
sation  of 
Trusts 


§  266.  The  last  species  of  monopoly  deserving  of  special  con- 
sideration is  that  represented  by  the  industrial  combinations,  or 
trusts,  which  have  been  characterised  as  "  capitalistic  monop- 
olies." As  now  used  in  the  United  States  the  term  "  trust  " 
applies  to  any  industrial  combination  which  is  so  large  as  to  be 
the  dominant  factor  in  the  branch  of  production  with  which  it 
is  concerned.  Many  such  combinations  are  not,  of  course, 
monopolies.  Inasmuch,  however,  as  their  main  purpose  ac- 
cording to  the  unanimous  testimony  of  their  promoters  is  to 
suppress  competition,  monopoly  may  be  said  to  be  the  goal  at 
which  they  are  aiming.  A  reasonable  definition  of  a  trust 
would  seem  to  be,  "  an  industrial  combination,  not  a  legal  nor 
natural  monopoly,  w-hich  seeks  to  throw  off  the  restraints  of 
competition  by  absorbing,  overawing,  or  crushing  its  would-be 
competitors." 

The  psychology  of  the  combination  movement  is  easy  to 
understand.  From  the  point  of  view  of  the  competitors  in  any 
line  of  business,  competition  is  an  evil  rather  than  a  blessing. 
It  tends  to  lower  prices  when  the  interest  of  each  individual 
competitor  demands  that  they  be  maintained.  It  has  been  too 
customary  in  economics  to  argue  as  though  the  only  motive 
of  the  entrepreneur  was  to  enlarge  the  volume  of  his  business. 
Quite  as  strong  is  his  desire  to  receive  high  prices  for  his 
products.  When  producers  are  numerous  and  widely  scattered 
and  competition  between  them  is  active,  the  individual  entre- 
preneur must  perforce  content  himself  with  such  price  as  the 
market  affords,  and  give  most  of  his  thought  and  attention  to 
keeping  down  his  expenses  of  production  by  developing  his 
business  to  the  size  most  conducive  to  efficiency.  The  latter 
aim  often  leads  him  to  cut  prices  in  the  hope  of  enlarging  his 

476 


The  Early  Trusts  477 

sales,  and  is  the  force  on  which  economists  rely  when  they 
assert  that  competition  tends  to  keep  prices  down  to  the  ex- 
penses of  production  of  representative  firms.  This  is  the 
situation  in  all  branches  of  business  in  which  small-scale  pro- 
duction is  the  rule.  Another  situation  is  that  in  which  a 
business  is  already  concentrated  into  a  few  highly  organised 
and  shrewdly  directed  plants  and  in  which  the  nature  of  the 
product,  a  protective  tariff,  or  some  other  barrier  excludes 
foreign  competition.  Competition  between  such  great  indus- 
trial plants  may  persist,  and  each  entrepreneur  may  continue 
to  seek  to  derive  his  profit  by  producing  more  cheaply  and 
underselling  his  competitors.  But  competition  is  a  wearing 
process.  It  is  quite  as  likely  that  the  competitors  may  agree 
to  combine  their  plants  and  seek  for  profit,  not  through  under- 
selling each  other,  but  through  maintaining  a  remunerative 
price  for  the  common  benefit.  If  to  this  immediate  advantage 
of  combination  is  added  the  prospect  that  through  it  the  ex- 
penses of  production  may  be  lowered,  and  the  competition  of 
firms  not  in  the  combination  suppressed,  its  attractions  so  far 
exceed  those  of  continued  independence  that  a  trust  is  almost 
certain  to  be  formed.  As  one  well-known  trust  organiser 
expressed  it,  in  words  originally  applied  to  the  railroad  busi- 
ness :  "  Where  combination  is  possible  competition  becomes  im- 
possible." 

The  oldest  industrial  combination  in  the  United  States  was  The  Early 
the  Standard  Oil  Trust,  formed  in  1882.  This  was  a  union  of 
oil  refineries  in  Ohio  and  Pennsylvania,  brought  about  by  the 
assignment  of  the  stock  of  these  companies  to  a  board  of  nine 
trustees  who  in  this  way  secured  complete  control  of  the  busi- 
ness. These  trustees  issued  trust  certificates  in  exchange  for 
the  shares  of  stock  assigned  to  them  and  agreed  to  pay  all 
dividends  declared  on  such  stock  to  the  holders  of  these  certifi- 
cates. All  of  the  earnings  of  the  different  companies  were 
pooled,  and  dividends  were  declared  pro  rata  on  the  trust  cer- 
tificates, whatever  might  be  the  disposition  made  of  particular 
plants  taken  into  the  combination.  This  was,  in  a  literal  sense, 
a  "  trust,"  and  from  it  all  later  combinations  have  derived  their 
rather  misleading  name.  Similar  trusts  were  organised  by 
leading  sugar-refiners  and  whiskey-distillers  in  1887.     In  1890 


478 


Trusts  in  the  United  States 


The 
Present 

Trusts 


Organisa- 
tion of  the 
United 
States 
Steel  Cor- 
poration 


the  Supreme  Court  of  the  State  of  New  York,  in  a  case  brought 
against  the  North  River  Sugar  Refining  Company,  one  of  the 
corporations  belonging  to  the  Sugar  Trust,  declared  this  form 
of  organisation  illegal.  The  Standard  Oil  Trust  was  dissolved 
on  similar  grounds  by  the  Supreme  Court  of  Ohio  two  years 
later. 

The  organisers  of  the  Sugar  Trust  lost  no  time  in  securing 
a  charter  from  the  State  of  New  Jersey  *  for  a  single  corpora- 
tion, the  American  Sugar  Refining  Company,  which  should 
absorb  the  plants  which  had  formed  the  Trust.  The  certificate- 
holders  of  the  Standard  Oil  Trust  followed  a  different  plan. 
Instead  of  creating  one  corporation,  the  trustees,  who  happened ' 
to  be  the  owners,  individually,  of  a  majority  of  the  stocks  of 
the  companies  forming  the  Trust,  divided  up  the  shares  of  these 
companies  among  themselves  in  such  a  way  that  they  con- 
tinued to  control  them  as  completely  as  they  had  under  the 
trust  agreement.  This  arrangement  was  continued  until  1899, 
vv^hen  the  managers  of  the  Oil  Trtist  secured  a  charter  from  the 
State  of  New  Jersey  for  a  corporation,  the  Standard  Oil  Com- 
pany of  America,  which  has  since  acquired  the  stocks  of  the 
constituent  companies  in  which  they  were  interested.  The 
prevailing  form  of  industrial  combination  has  thus  come  to  be 
the  single  corporation  buying  outriglit  the  property  or  shares 
of  stock  of  the  companies  combined  in  it,  and  preserving  none 
of  the  characteristics  of  the  original  trust  except  that  control 
of  the  business  is  still  lodged  with  a  small  group  of  men  whose 
personal  integrity  is  about  the  only  guarantee  which  stock- 
holders have  that  the  aft'airs  of  the  combination  will  be  honestly 
administered. 

Still  a  third  form  of  organisation  was  adopted  by  the  United 
States  Steel  Corporation,  chartered  in  March,  1901,  to  combine 
the  leading  steel  businesses  of  the  country.  According  to  this 
plan,  the  new  company  issued  bonds  and  stock  in  exchange  for 
the  bonds  and  stocks  of  the  constituent  companies,  but  without 
depriving  the  latter  of  their  existence.    The  new  corporation  is 

*The  corporation  law  of  New  Jersey  had  been  amended  in  1S89  so 
as  to  permit  companies  organised  under  it   to  own   and  control   the 
stocks  and    bonds  of  other   companies.      Cf.   Meade,  Trust  Finance 
Chapter  III. 


The  Trust  Movement  479 

thus  a  federation  of  the  smaller  corporations  of  which  it  is 
composed.  Its  directors  select  all  the  officers  of  the  subordinate 
companies,  and  all  the  dividends  earned  by  them  are  turned  into 
the  general  treasury  for  distribution  among  the  stockholders 
of  the  larger  corporation. 

§267.  From  the  time  of  the  organisation  of  the  Standard  T^^.. 
Oil  Trust,  until  January  i,  1898,  the  progress  of  the  trust  Trusts 
movement  was  slow.  At  the  latter  date  there  were  in  exist- 
ence less  than  a  dozen  large  industrial  combinations,  of  which 
the  principal  were:  The  Standard  Oil  Trust,  the  American 
Sugar  Refining  Company,  the  American  Tobacco  Company, 
the  United  States  Rubber  Company,  the  United  States  Leather 
Company,  the  American  Cotton  Oil  Company,  and  the  Glucose 
Sugar  Refining  Company.  The  aggregate  capitalisation  of 
these  seven  combinations  was  less  than  $500,000,000. 

During  the  years  1898  to  1900  there  ensued  a  veritable  stam-  Progress 
pede  among  the  managers  of  businesses  of  all  kinds  to  enter  Trust 
into  combinations.  According  to  a  reliable  estimate  149  large  Movement 
combinations,  with  a  capitalisation  of  over  $3,000,000,000, 
were  formed  during  these  years.  The  United  States  Census 
Bureau  made  an  investigation  of  the  industrial  combinations 
carrying  on  business  in  the  United  States  on  May  31,  1900.  Its 
inquiry  was  limited  to  bona  fide  combinations,  that  is,  to  plants 
that  had  formerly  appeared  as  competitors,  and  in  consequence 
several  enterprises  {e.g.,  the  Carnegie  Steel  Company)  which 
are  usually  thought  of  as  trusts,  were  not  considered.  Accord- 
ing to  the  Census  Report,  there  were  in  the  United  States,  on 
the  given  date,  183  industrial  combinations  controlling  2029 
plants.  The  capitalisation  of  these  corporations  was  a  little 
over  $3,000,000,000,  of  which  about  $1,800,000,000  was  repre- 
sented by  common  stock,  $1,000,000,000  by  preferred  stock, 
and  $216,000,000  by  bonds.  These  figures  are  more  conserva- 
tive than  those  given  by  financial  papers  for  the  same  period, 
and  are  certainly  not  exaggerated.  Since  the  Census  inquiry 
was  made,  several  new  combinations,  including  the  giant  United 
States  Steel  Corporation,  have  been  effected.  The  capital  of 
the  latter  company  alone  was  $1,400,000,000,  of  which  $304,- 
000.000  were  represented  by  bonds  and  the  remainder  was 
divided   equally   between  ■  common   and    preferred   stock.      It 


480  Trusts  in  the  United  States 

would  be  misleading  to  add  the  entire  capitalisation  of  this  new 
corporation  to  the  figures  given  in  the  Census  Report,  as  most 
of  its  stock  represents  the  stock  of  constituent  companies  which 
figured  in  that  investigation.  At  the  same  time,  some  $500,- 
000,000  ought  to  be  added  on  its  account,  as  its  capitalisation 
was  generously  watered.  Taking  this  and  other  recent  com- 
binations into  account,  $5,000,000,000  is  believed  to  be  a  conser- 
vative estimate  of  the  aggregate  capitalisation  of  the  industrial 
combinations  doing  business  in  the  United  States  on  July  i, 
1903. 

Th®.  §  268.  The  remarkable  progress  of  the  trust  movement  after 

Motives  of     ,  „  „  ^     ^  .       ,  .         ,    , 

Manu-  January  i,  1898,  suggests  a  connection  between  it  and  the  con- 

facturers  temporaneous  revival  of  business  prosperity.  What  that  con- 
nection was  is  easily  explained.  The  motives  which  led  manu- 
facturers to  enter  the  trusts  were  the  desire  to  suppress  compe- 
tition and  to  realise  the  economies  of  combination.  By  them- 
selves these  motives  lost  rather  than  gained  in  strength  with 
the  revival  of  prosperity.  Working  with  them,  however,  was 
the  motive  of  the  stock  operator.  Promoters,  underwriters,  and 
"  insiders  "  generally,  wished  to  realise  profits  from  the  sale  of 
new  securities  on  a  buoyant  stock  market,  and  these  were  the 
men  who  were  most  active  in  bringing  about  the  combinations. 
The  country  had  just  passed  through  four  years  of  serious  busi- 
ness depression.  Failures  had  been  common,  and  even  firms 
which  succeeded  in  avoiding  bankruptcy  had  felt  to  the  full  the 
pressure  of  a  relentless  competition.  It  was  in  this  period  that 
the  phrase  "  competition  is  the  death  of  trade  "  became  current 
and  that  the  benefits  of  combination  as  exemplified  in  the  suc- 
cessful trusts,  the  Standard  Oil  Company,  the  American  Sugar 
Refining  Company,  and  the  American  Tobacco  Company,  were 
extolled.  There  seemed  no  reason  why  similar  combinations 
might  not  be  effected  with  equal  success  in  other  branches  of 
business.  The  favourable  mental  attitude  of  business  managers 
was  paralleled  by  a  very  hopeful  feeling  on  the  part  of  the 
investing  public.  After  the  long  years  of  depression,  the  large 
returns  to  agriculture  and  other  branches  of  industry  enjoyed 
in  1897  set  free  a  large  surplus  for  investment.  There  was  thus 
a  ready  welcome  for  the  new  securities  of  the  industrial  com- 
binations, which  were  made  to  seem  even  more  promising  than 


The  Activity  of  Promoters  481 

railroad  stocks  had  appeared  during  the  golden  age  of  railway 
promotion. 

Several  of  the  combinations  organised  in  1898  resulted  from  The 
the  activity  of  energetic  manufacturers  in  whom  their  associ-  promo\^^s 
ates  and  former  competitors  had  confidence.  They  were  literally 
"  combinations  "  of  former  competitors,  spontaneously  entered 
into  for  mutual  advantage.  As  time  w^ent  on,  however,  it  became 
more  and  more  the  rule  for  combinations  to  be  efifected  by  pro- 
fessional promoters,  who  made  up  for  their  ignorance  of  the 
practical  details  of  the  businesses  that  they  proposed  to  unite  by 
their  knowledge  of  finance  and  their  skill  in  persuading  others 
of  the  merits  of  their  plans.  The  method  usually  pursued  by  the 
professional  promoter  was  as  follows :  The  leading  competitors 
in  the  selected  branch  of  industry  were  first  persuaded  that 
combination  would  be  a  good  thing  for  the  trade  as  a  whole 
and  induced  to  give  their  assent  to  the  general  plan  of  organi- 
sation. This  task  was  usually  easy.  Expert  appraisers  were 
then  set  to  work  to  determine  the  cash  value  of  the  plants  to  be 
combined.  Armed  with  information  so  obtained,  the  promoter 
had  next  to  bargain  with  the  owners  of  the  dififerent  plants  to 
determine  the  terms  upon  which  they  should  enter  the  com- 
bination. Meantime,  a  charter  was  secured,  usually  from  the 
State  of  New  Jersey,  authorising  a  certain  aggregate  issue  of 
common  and  preferred  stock,  and  arrangements  were  made  with 
some  private  banking  or  trust  company  to  finance  the  under- 
taking. The  usual  arrangement  made  with  individual  owners 
was  that  for  each  plant  taken  into  the  combination  preferred 
stock,*  equal  at  par  to  the  assessed  value  of  the  business,  plus 
a  bonus  of  an  equal  amount  of  common  stock,  should  be  given. 
C)ften,  however,  it  was  necessary  to  pay  the  assessed  value  of 
the  desired  business  in  cash  and  sometimes  to  pay  considerably 
more  than  this  assessed  value.  At  this  point  the  assistance  of 
the  underwriter  would  be  needed.     The  arrangement  between 

*  Preferred  stock  is  stock  which  enjoys  a  preference  as  regards  both 
dividends  and  assets.  The  rate  of  dividend  to  which  it  is  entitled 
must  be  paid  before  any  dividend  can  be  declared  on  the  common 
stock.  Frequently  the  preferred  dividends  are  made  "  cumulative," 
that  is,  when  unpaid  in  any  year,  they  constitute  a  prior  lien  upon  the 
earnings  of  the  company  in  succeeding  years  and  must  be  fully  met 
before  any  dividends  can  be  declared  on  the  common  stock. 


482 


Trusts  in  the  United  States 


Reasons 
for 

Formation 
of  Steel 
Trust 


promoter  and  underwriter  was  usually  that  preferred  stock  to 
a  certain  aggregate  amount  should  be  taken  at  a  certain  price 
and  paid  for  in  cash,  as  the  latter  might  be  required.  To  this 
preferred  stock  might  be  added,  as  a  bonus,  an  equal  or  even  a 
larger  amount  of  common  stock.  Besides  the  cash  needed  to 
purchase  the  plants  of  reluctant  owners,  the  promoter  usually 
required  money  in  the  treasury  to  insure  the  initial  success  of 
the  combination.  This  also  was  secured  from  the  underwriter. 
The  promoter's  own  profit  might  come  in  the  form  of  cash 
received  from  the  underwriting  syndicate,  or  in  the  form  of 
stock  in  the  new  enterprise,  to  be  held  or  sold  as  his  judgment 
might  determine.  How  largely  it  was  sometimes  necessary  to 
overcapitalise  a  combination,  in  order  to  satisfy  the  demands  of 
all  those  connected  with  it,  is  illustrated  by  the  case  of  the 
Whiskey  Trust.  According  to  testimony  presented  before  the 
Industrial  Commission,  for  each  $100,000  cash  value  of  the 
plants  taken  into  the  combination  $100,000  preferred  stock  and 
$100,000  common  stock  went  to  the  owner,  $150,000  common 
stock  went  to  the  promoter,  and  $100,000  preferred  and  $150,- 
000  common  went  to  the  underwriter,  the  latter  being  required 
to  furnish  a  certain  amount  of  cash  to  serve  as  the  working 
capital  of  the  enterprise.  Professor  Jenks  calculates  that  the 
promoters  and  underwriters  of  the  trust  received  $10,700,000  in 
preferred  and  $13,360,000  in  common  stock,  in  exchange  for 
$3,500,000  in  cash.  What  their  profits  were  it  is  impossible 
to  say,  but  judging  from  the  quotations  for  the  stock  immedi- 
ately after  the  combination  was  launched,  they  probably 
amounted  to  several  million  dollars.  In  another  case,  that  of 
the  Tin  Plate  Trust,  evidence  was  presented  before  the  Indus- 
trial Commission  showing  that  the  promoter  received  $10,000,- 
000  in  common  stock  for  his  services,  and  that  he  probably  real- 
ised $2,000,000  to  $3,000,000  profit  from  the  undertaking. 
These  facts  indicate  the  motives  of  promoters  and  under- 
writers and  account  for  their  activity  in  bringing  the  trusts 
into  being. 

One  important  combination,  the  United  States  Steel  Cor- 
poration, was  organised  for  somewhat  different  reasons. 
The  combinations  of  previous  years  had  concentrated  the  man- 
agement of  the  iron  and  steel  businesses  of  the  country  into  a 


The  Steel  Trust  483 

few  hands.  The  strongest  and  most  aggressive  of  the  steel 
manufacturers  was  Mr.  Andrew  Carnegie,  whose  plants  were 
devoted  partly  to  the  production  of  materials  to  be  made  up 
into  more  finished  forms  by  other  manufacturers.  During  the 
year  1900  and  the  early  months  of  1901  the  competition  between 
the  great  steel  companies  assumed  a  very  threatening  aspect. 
The  trusts  were  developing  in  a  direction  which  made  them  less 
and  less  dependent  upon  the  Carnegie  Company  for  their  mate- 
rials, and  'SIt.  Carnegie,  on  his  side,  was  threatening  to  enter 
upon  the  manufacture  of  additional  finished  products.  A  steel- 
hoop  plant  was  actually  built  by  his  company  and  plans  were 
made  for  a  large  tube  mill.  All  those  interested,  and  especially 
the  managers  of  the  trusts,  who  recognised  the  superior  or- 
ganisation and  efficiency  of  the  Carnegie  Company,  shrank 
from  the  outlays  which  would  have  been  involved  in  this 
threatened  competition.  It  was  estimated  that  plans  under 
consideration  in  January,  1901,  called  for  the  expenditure  of 
from  $150,000,000  to  $250,000,000  in  the  duplication  of  iron 
and  steel  plants  for  the  sole  puipose  of  wresting  business  from 
competitors.  It  was  at  this  point  that  Mr.  J.  P.  Morgan  was 
appealed  to  to  reconcile  the  conflicting  interests  by  combining 
the  earlier  combinations  and  the  Carnegie  Steel  Company  into 
a  billion-dollar  trust.  I\Ir.  Carnegie  himself  appears  to  have 
been  the  least  eager  of  those  concerned  for  the  combination. 
At  any  rate,  he  was  induced  to  come  in  only  on  terms  far  more 
favourable  than  those  accorded  to  any  of  his  competitors.  In 
this  instance,  combination  resulted  from  the  fear  of  the  de- 
structive effects  of  competition  between  companies  which  had 
already  become  so  large  as  to  make  competition  of  that  Hfe- 
and-death  order  that  has  become  familiar  in  connection  with 
railroad  enterprises.  The  combination  was  not  accomplished, 
of  course,  without  the  assistance  of  an  underwriters'  syndicate, 
and  the  remarkable  success  of  the  Corporation  during  the  years 
1 901  and  1902  made  the  profits  of  this  syndicate  large  even  in 
comparison  with  the  returns  from  other  successful  trust  opera- 
tions. As  much  as  $50,000,000.  or  200  per  cent.,  on  the 
money  they  were  actually  called  upon  to  advance,  was  divided 
among  its  members. 

§  269.  That  professional  promoters  had  much  to  do  with 


484 


Trusts  in  the  United  States 


Distrust 
of  Trusts 
on  the 
Part  of 
the  Public 


The 

Successful 

Trusts 


the  organisation  of  many  of  the  trusts  is  indicated  by  their 
financial  results.  Of  the  183  industrial  combinations  investi- 
gated by  the  Census  Bureau  in  1900,  but  121  paid  dividends. 
Moreover,  of  the  ninety-two  paying  dividends  on  their  pre- 
ferred stock,  only  thirty  paid  also  on  their  common  stock. 
Thus  one-third  of  the  total  number  paid  no  dividends  at  all 
and  another  one-third  paid  no  dividends  to  common-stock 
holders.  The  estimation  in  which  business  men  hold  trust 
securities  is  indicated  by  the  relatively  low  prices  at  which  the 
stocks  even  of  those  which  have  paid  dividends  since  the  date 
of  their  organisation  may  be  purchased.  United  States  Steel 
preferred,  which  is  entitled  to  a  cumulative  dividend  of  7  per 
cent.,  has  never  been  quoted  much  above  par  and  in  November, 
1903,  was  quoted  as  low  as  50,  although  dividends  had  been 
regularly  paid  on  the  common  and  large  surplus  earnings  had 
been  accumulated.  Even  the  older  trusts  are  still  far  from 
commanding  the  confidence  of  the  public.  In  the  year  1901 
the  stock  of  the  Amalgamated  Copper  Company  (the  Copper 
Trust)  fell  from  130,  its  highest  price  in  June,  to  6o/^  in 
December.  During  the  year  as  many  as  11,826,038  shares  of 
this  stock,  of  which  the  total  issue  amounts  only  to  1,550,000 
shares,  changed  hands  on  the  New  York  Stock  Exchange. 
In  the  same  year  the  price  of  the  common  stock  of  the 
American  Sugar  Refining  Company,  one  of  the  oldest  and 
most  ably  managed  of  the  trusts,  fell  from  June  to  December 
from  153  to  iOT,y2.  The  sales  of  this  stock  aggregated 
8,174,362  shares,  or  more  than  eleven  times  the  total  issue. 
These  violent  fluctuations  in  price,  coupled  with  the  large 
volume  of  dealings,  illustrate  fairly  well  the  attitude  of  inves- 
ors  toward  the  trusts.  Conservative  capitalists  avoid  them 
altogether,  and  those  who  do  purchase  their  securities  are 
easily  frightened  into  selling  again  by  every  unfavourable 
rumour. 

Striking  as  has  been  the  failure  of  some  of  the  recent  com- 
binations, it  is  not  to  be  denied  that  the  success  of  others  is 
even  more  noteworthy.  Confining  attention  to  the  three  trusts 
that  have  paid  dividends  over  the  longest  period  of  years,  we 
may  note  the  following  facts  :  The  Standard  Oil  Company  paid 
dividends  on  its  capital  of  $100,000,000  at  the  rate  of  12  per 


Control  of  Trusts  over  Production       485 

cent,  from  1891  to  1895.  In  1896  it  paid  31  per  cent.,  in  1897 
33  per  cent.,  in  1898  ^o  per  cent.,  in  1899  33  per  cent.,  in  1900 
and  1901  each  48  per  cent.,  and  in  1902  45  per  cent.  The 
American  Tobacco  Company  began  paying  dividends  on  its 
common  stock  at  the  rate  of  12  per  cent,  a  year  in  1893.  This 
rate  was  continued  in  1894  and  1895.  In  1896  6  per  cent,  and 
a  20  per  cent,  stock  dividend  were  paid.  In  1897  the  rate  on 
the  enlarged  capitahsation  was  9  per  cent,  and  in  1898  8  per 
cent.  In  1899  7  per  cent,  and  a  100  per  cent,  stock  dividend 
were  paid.  Six  per  cent,  on  the  increased  capitahsation  was 
paid  in  1900  and  1901,  and  9  per  cent,  in  1902.  In  addition, 
this  company  has  paid  continuously  8  per  cent,  annually  on  its 
preferred  stock.  The  American  Sugar  Refining  Company  paid 
4  per  cent,  on  its  common  stock  in  the  year  of  its  organisation. 
The  following  year,  1892,  it  paid  lo^^  per  cent.,  in  1893  21  >4 
per  cent.,  from  1894  to  1899  12  per  cent,  annually,  in  1900  7-;4 
per  cent.,  and  in  1901  and  1902  each  7  per  cent.  This  com- 
pany has  also  paid  regularly  7  per  cent,  on  its  preferred  stock. 
Comment  on  the  above  showing  is  hardly  necessary.  Even  on 
the  assumption  that  all  three  of  these  enterprises  were  con- 
servatively capitalised  at  the  outset,  their  success  far  exceeds 
anything  to  be  found  in  the  annals  of  competitive  business. 

§  270.  In  every  branch  of  production  in  which  trusts  have  Extent  of 
been  formed  in  the  United  States,  some  semblance  of  competi-  Trustsover 
tion  has  been  preserved.  Thus  even  the  Standard  Oil  Com-  Production 
pany  is  said  to  control  (January,  1903)  only  about  65  per  cent, 
of  the  refined,  and  an  even  smaller  proportion  of  the  crude 
mineral  oil  production  of  the  country.  In  his  testimony  before 
the  Industrial  Commission,  Mr.  Havemeyer,  president  of  the 
American  Sugar  Refining  Company,  put  the  sugar  output  of 
the  Trust,  in  1900,  at  about  90  per  cent,  of  that  of  all  the  refin- 
eries in  the  United  States,  Representatives  of  the  United  States 
Steel  Corporation  stated  before  the  Commission  that  its  product 
equalled  from  65  to  75  per  cent,  of  the  total  steel  output  of  the 
country.  Other  testimony  indicated  that  the  United  States 
Rubber  Company  produced  70  per  cent,  of  all  the  rubber  boots 
and  shoes  manufactured  in  the  United  States ;  that  the  Inter- 
national Paper  Company  produced  70  per  cent,  of  the  news- 
print paper  of  the  country ;  that  the  National  Salt  Company 


486 


Trusts  in  the  United  States 


Resulting 
Control 
over  Prices 


Limits  to 
this  Control 


controlled  from  80  to  90  per  cent,  of  the  salt  produced  east  of 
the  Rocky  Mountains ;  that  the  Pittsburg  Plate  Glass  Com- 
pany controlled  about  '/2y2  per  cent,  of  the  total  output  of  plate 
glass  ;  and,  finally,  that  the  National  Starch  Company  produced 
90  per  cent,  of  the  country's  box  starch.  These  figures  are 
fairly  typical  of  the  trusts  generally. 

Although  not  entirely  without  competitors,  trusts  which  con- 
trol 60  per  cent,  or  more  of  the  total  supply  of  a  commodity  may 
unquestionably  regulate  its  price  within  considerable  limits  and 
for  considerable  periods  of  time.  Independent  producers  will 
compete  with  the  combination  by  lowering  prices  only  to  the 
extent  necessary  to  sell  the  output  of  their  plants.  As  their 
product  satisfies  only  40  per  cent,  of  the  demand,  the  public 
must  also  purchase  from  the  trust.  The  latter  may  put  up  the 
price,  at  least  temporarily,  to  any  point  it  pleases  below  that 
which  so  curtails  the  demand  that  the  independent  producers 
can  supply  the  whole  market.  Independents  will  adjust  their 
prices  to  the  trust  price,  cutting  under  the  latter  only  enough 
to  insure  the  sale  of  the  outputs  of  their  plants.  Any  falling 
ofT  in  demand  due  to  the  higher  price  fixed  by  the  trust  will 
afifect  the  trust's  business,  but  unless  the  falling  off  is  very 
marked,  or  the  conditions  are  such  that  independents  can 
quickly  enlarge  their  producing  capacities,  the  trust  managers 
may  for  some  time  maintain  the  price  and  reap  a  monopoly 
profit.  In  case  the  trust  desires  to  lower  the  price,  on  the  other 
hand,  it  can  compel  independents  to  follow  its  lead,  as  it  usually 
has  a  much  larger  producing  capacity  than  it  normally  uses. 
Thus,  President  Havemeyer  said  of  the  Sugar  Trust  that  while 
it  actually  supplied  only  90  per  cent,  of  the  country's  demand, 
it  could  supply  120  per  cent.  This  flexible  producing  capacity 
characteristic  of  the  trusts  enables  them  to  enforce  lower  prices 
even  in  the  face  of  an  active  demand,  or  to  prevent  prices  from 
rising  when  an  increase  in  the  demand  would  tend  to  elevate 
them. 

In  the  exercise  of  its  control  over  prices  a  trust  must,  of 
course,  use  great  caution.  Fixing  the  price  considerably  above 
the  expenses  of  production  invites  competition,  and  if  such  a 
price  is  maintained  it  will  only  be  a  question  of  time  when  the 
trust's  output  shall  become  such  a  small  proportion  of  the  total 


Opinions  in  Reference  to  Trusts         487 

supply  that  its  dominant  position  in  the  industry  is  lost.  Es- 
tablishing too  low  a  price,  on  the  other  hand,  means  loss  to 
the  trust  as  well  as  to  independent  competitors.  Though,  gen- 
erally speaking,  the  trusts  can  afford  larger  losses  than  inde- 
pendent companies,  it  is  doubtful  whether  they  can  afford  to 
sell  below  cost  for  a  longer  period  than  their  rivals.  Their 
resources  arc  larger,  but  their  losses  on  their  larger  sales  would 
be  proportionately  greater.  The  usual  result  when  a  trust 
adopts  the  policy  of  selling  below  its  expenses  of  production  is 
not  to  bankrupt  the  competitor,  but  to  persuade  him  to  throw 
in  his  fate  with  that  of  the  combination.  Judging  from  the 
experience  of  the  Sugar  Trust,  the  terms  on  which  losing  com- 
petitors may  be  induced  to  enter  a  losing  combination  in  the 
hope  of  establishing  a  profitable  combination  are  not  always 
tmfavourable  to  the  independents. 

It  is  a  debatable  question  whether  the  control  which  the  Conflicting 
typical  trust  is  able  to  exercise  over  price,  because  of  the  large  Reference 
proportion  of  the  product  which  it  supplies,  increases  or  de-  to  Trusts 
creases  with  the  passage  of  time.  Some  investigators  maintain 
that  the  trust  form  of  organisation  is  favourable  to  economical 
production,  and  that  a  well-managed  trust,  once  launched,  will 
dominate  to  an  increasing  extent  the  business  with  which  it  is 
concerned.  Other  writers  argue  that  but  for  certain  unfair 
practices,  none  of  the  trusts  would  be  able  to  hold  their 
own  for  any  great  length  of  time,  and  that  the  suppression  of 
such  practices  would  soon  demonstrate  that  competition  is  an 
irrepressible  force  in  a  country  in  which  an  equal  system  of 
justice  prevails.  Still  others  go  so  far  as  to  say  that  the  force 
of  competition  is  so  persistent  that  not  only  the  alleged  econo- 
mies resulting  from  combination,  but  also  the  unfair  practices 
complained  of  are  powerless  to  suppress  it.  They  interpret 
the  trust  movement  as  a  gigantic  swindle  perpetrated  on  the 
investing  public  by  promoters  and  underwriters  who  have  been 
favoured  by  a  period  of  great  industrial  prosperity  in  their 
effort  to  make  the  trusts  appear  to  be  sound  business  enter- 
prises. These  writers  see  at  every  hand  signs  that  the  trusts 
are  on  the  road  to  failure,  and  look  to  the  next  period  of  in- 
dustrial depression  for  the  proof  of  their  theories.  To  decide 
intelligently  between  these  opposing  views,  one  must  come  to 


488  Trusts  in  the  United  States 

some  conclusion   in   regard   to  the   economies   in   production 

which  are  credited  to  the  trusts. 

Economies        §  271.  In  addition  to  the  general  economies  resulting:  from 
Effected  by    .  ,  ,       .  ,       ,         ,         ,•  ,     -        ^. 

Trusts  large-scale    production,    and    already    discussed    in    Chapter 

VIII.,  Section  85,  there  are  special  advantages  which  pertain 
to  combinations.  One  consideration  favourable  to  the  trusts 
is  that  after  the  first  step  separating  the  individual  firm  from 
the  corporation  with  a  salaried  president  or  manager  has  been 
taken,  there  need  be  no  increased  loss  of  efficiency  as  the 
business  grows.  Since  reliance  for  the  direction  of  the  enter- 
prise is  put  in  any  case  in  salaried  employees,  it  makes  little 
diff'erence  whether  these  employees  are  few  or  many.  An  able 
president  may  hold  the  managers  of  the  individual  plants  over 
which  he  has  general  supervision  to  as  strict  account  for  the 
efficient  performance  of  their  duties  as  that  to  which  the  direct- 
ors hold  him  himself.  The  larger  the  enterprise  the  larger  is 
the  salary  which  it  can  afford  10  pay  to  its  responsible  manager 
and  the  abler  the  manager  whose  services  it  can  command.  It 
follows,  it  is  claimed,  that  instead  of  losing  in  efficiency  on 
account  of  its  size,  a  trust  gains  in  efficiency.  The  truth  of  this 
contention  depends  obviously  upon  whether  the  higher  salary 
paid  by  a  trust  to  its  chief  executive  really  secures  the  highest 
grade  of  ability.  The  three  combinations  which  have  succeeded 
most  brilliantly  have,  undoubtedly,  been  directed  with  re- 
markable skill  and  foresight.  They  have  devised  plans  for 
securing  the  loyal  co-operation  of  their  thousands  of  employees, 
and  have  selected  for  important  positions  the  best  men  to  be 
had  for  the  tasks  assigned  them.  The  phenomenal  success  of 
the  Carnegie  Steel  Company  before  it  was  merged  into  the 
trust  furnishes  an  example  of  what  may  be  achieved  through 
organisation.  As  the  result  of  thought  and  experiment,  Mr. 
Carnegie  and  his  associates  devised  methods  by  which  every 
employee  in  every  department  of  the  business,  from  highest  to 
lowest,  was  made  to  feel  as  keen  an  interest  in  the  result 
of  his  day's  work  as  though  he  were  to  be  the  sole  beneficiary 
from  it.  High  wages  and  salaries  were  paid,  and  the  prospect 
of  still  higher  remuneration  was  held  out  to  all  who  could  in- 
crease their  productiveness.  The  result  was  a  business  which, 
in  spite  of  its  huge  proportions — its  earnings  were  said  to  be 


Reduced  Expenses  for  Advertising^      489 

$70,000,000  in  a  single  year — compared  in  efficiency  in  every 
department  with  any  other  enterprise,  large  or  small,  to  be 
found  in  that  branch  of  industry.  But  the  same  circumstances 
that  enable  efficient  chief  executives  to  contribute  so  largely 
to  the  success  of  trusts  increase  the  power  for  injury  of 
inefficient  managers.  The  presidents  of  the  highly  success- 
ful trusts  have  been  willing  to  devote  their  unusual  abilities 
to  the  great  enterprises  with  which  their  names  are  identified 
because  these  were,  in  a  real  sense,  their  enterprises.  The 
services  of  such  men  cannot  be  secured  by  the  mere  payment 
of  high  salaries.  It  is  here  that  a  serious  obstacle  to  the 
permanent  success  of  great  industrial  combinations  is  en- 
countered. The  few  men  who  have  the  ability  to  direct  such 
vast  enterprises  are  increasingly  in  demand,  and  the  chance 
that  a  board  of  directors  which  has  chosen  a  president  wisely 
once  will  do  so  again,  and  yet  again,  is  small.  These  consider- 
ations suggest  a  reason  for  the  phenomenal  success  of  some  of 
the  trusts  and  for  the  no  less  meteoric  failure  of  others. 

A  more  certain  advantage  of  trust  organisation  is  economy  Reduced 
in  connection  with  the  sale  of  products.  A  large  part  of  the  for^Adver- 
expenditure  for  advertising,  travelling  salesmen,  etc.,  necessary  tising 
to  success  in  competitive  businesses, is  necessary  simply  because 
of  the  competition.  The  sale  of  whiskey  and  tobacco,  for  in- 
stance, is  probably  not  increased  materially  by  the  hundreds  of 
thousands  of  dollars  expended  annually  on  advertising.  The 
sale  of  particular  brands,  however,  is  increased.  A  combina> 
tion  which  unites  all  of  the  plants  producing  different  brands 
under  one  management  dispenses  with  the  need  for  competi- 
tive advertising.  The  more  complete  the  monopoly  of  the 
combination  the  more  fully,  obviously,  it  may  economise,  in 
this  department  of  its  business.  The  testimony  obtained  by  the 
Industrial  Commission  teems  with  illustrations  of  this  species 
of  economy.  It  was  stated  that  the  American  Steel  and  Wire 
Company  dismissed  nearly  two  hundred  of  its  travelling  sales- 
men, without  any  loss  in  efficiency.  The  whiskey  combina- 
tion dispensed  with  three  hundred  of  its  salesmen,  and  thereby 
effected  an  annual  saving  in  salaries  estimated  by  its  president 
at  $1,000,000.  Other  ways  in  which  combination  lessens 
expenses  in  selling  goods  were  brought  out  by  different  wit- 


490 


Trusts  in  the  United  States 


Saving 
in  Cross 
Freights 


Better 
Adaptation 
of 

Production 
to  Demand 


Minor  Ad- 
vantages 


nesses.  Thus,  the  practice  of  giving  premiums  may  be  dis- 
continued, as  also  that  of  granting  credit  to  customers  whose 
business  standing  is  doubtful,  in  order  to  retain  their  trade. 

A  third  advantage,  especially  in  connection  with  trusts  pro- 
ducing bulky  articles,  is  a  saving  in  cross-freights.  In  the  salt 
business,  for  example,  the  \:ost  of  freight  is  a  principal  item  of 
expense.  The  National  Salt  Company,  having  wells  in  differ- 
ent sections,  is  able  to  fill  each  order  from  the  plant  nearest  the 
town  from  which  the  order  comes.  It  is  thus  able  to  supply 
salt  at  much  less  expense,  the  country  over,  than  could  a  com- 
pany whose  wells  were  all  in  one  place.  The  same  principle 
applies  in  the  iron  and  steel  business.  Thus  an  officer  of  the 
American  Steel  and  Wire  Company  told  the  Industrial  Com- 
mission that  his  company  saved,  by  having  plants  at  different 
points,  at  least  $500,000  a  year  on  its  freight  bill.  This  ad- 
vantage does  not  apply,  of  course,  to  local  competitors  who 
aim  to  secure  merely  the  local  market. 

A  fourth  advantage  is  that  trusts  can  adjust  the  output  of 
their  plants  to  the  irregularities  of  the  market  better  than 
smaller  producers.  Not  only  are  they  in  a  position  to  get  a 
broader  view  of  market  conditions,  but  they  may  organise  their 
different  plants  so  that  those  in  the  smaller  places,  where  the 
labour  supply  is  less  steady  and  reliable  than  in  large  cities, 
may  be  run  continuously,  while  the  latter  may  be  rim  or  shut 
down  as  the  conditions  of  the  market  demand.  Thus,  the 
American  Sugar  Refining  Company  is  said  to  use  its  Brooklyn 
Refinery  as  a  sort  of  safety  valve  to  its  business.  When  the 
demand  for  sugar  is  active  and  the  trust  is  understocked,  its 
rate  of  production  can  be  largely  increased  at  a  very  small  cost 
by  running  this  refinery  at  top  speed.  In  the  face  of  adverse 
conditions  a  curtailment  of  production  is  equally  easy. 

Among  minor  advantages  claimed  for  the  trusts,  as  distinct 
from  advantages  enjoyed  by  all  large-scale  producers,  is  the 
ability  to  satisfy  the  different  tastes  of  consumers  by  offering 
a  varied  stock  of  goods.  This  is  believed  to  have  been  an  im- 
portant circumstance  in  connection  with  the  success  of  the 
American  Tobacco  Company.  A  similar  advantage  is  ability 
to  supply  on  demand  a  practically  unlimited  quantity  of  any 
good.     It  is  stated  that  the  American  Sugar  Refining  Company 


Illegitimate  Practices  491 

Is  able  to  get  one-eighth  of  a  cent  a  pound  more  for  its  sugar 

than  its  competitors  because  jobbers  prefer  to  order  where  they 

can  be  sure  of  securing  at  once  all  that  they  require.     These 

various  advantages  which  contribute  in  greater  or  less  degree 

to  the  success  of  the  trusts  may  be  called  legitimate,  because 

they  enable  the  trusts  to  perform  the  same  services  for  the 

public    more    cheapl\-    than    could    competing    independent 

companies. 

§  272.  Critics  of  the  trusts  charge  them  with  three  lines  of  Illegiti- 

policy  that  are  squarely  opposed  to  the  general  interest  and  practices 

therefore  illegitimate.     They  are  said  to  obtain  discriminating  of  the 

Trusts 
rates  from  the  railroads  in  defiance  of  the  Interstate  Commerce 

Act,  to  take  advantage  of  their  national  position  to  cut  prices  at 
certain  points  in  order  to  stifle  competition  while  recouping 
themselves  by  maintaining  prices  at  non-competitive  points, 
and  finally  to  make  unfair  contracts  with  jobbers  and  retailers 
under  which  the  latter  boycott  the  products  of  independent 
producers. 

The  trust  which  has  been  most  widely  accused  of  securing  Obtain- 
special  favours  from  the  railroads  is  the  Standard  Oil  Com-  ^J-^crimt- 
pany.  That  such  favours  were  commonly  enjoyed  prior  to  the  nations 
enactment  of  the  Interstate  Commerce  Act  has  been  proved  Railroads 
beyond  question.  Subsequently,  according  to  the  directors  of 
the  Trust,  it  has  paid  the  same  rates  on  oil  as  other  shippers. 
Its  critics  do  not  deny  this,  but  claim  that  it  has  continued  by 
indirect  means  to  enjoy  many  special  advantages  over  its  com- 
petitors. In  the  first  place  it  has  secured  control  of  most  of 
the  important  pipe  lines  conveying  crude  petroleum  from  the 
wells  to  the  points  where  it  is  refined.  In  its  management  of 
these  pipe  lines  it  should  be  controlled  by  the  law  which  re- 
quires common  carriers  to  accord  equal  treatment  to  all  ship- 
pers, but  it  is  claimed  that  it  constantly  discriminates  in  its  own 
favour.  It  is  so  much  cheaper  to  pipe  the  oil  than  to  ship  it 
by  rail  that  this  gives  it  a  marked  advantage  over  its  competi- 
tors in  many  of  the  most  important  markets  of  the  country. 
Again,  in  consequence  of  the  large  scale  of  its  operations  the 
Standard  Oil  Company  is  able  to  maintain  a  full  equipment  of 
tank-cars,  receiving  tanks,  and  tank  wagons  in  all  parts  of  the 
countrv  and  secures  from  the  railroads  lower  rates  for  tank 


492 


Trusts  in  the  United  States 


Price  Dis- 
crimination 
among 
Places 


than  are  charged  for  barrel  shipments,  often  the  only  sort  open 
to  "  independents."  Finally  it  is  alleged,  though  it  cannot  be 
said  to  have  been  proved,  that  the  tank  cars  of  the  Standard  Oil 
Company  are  sometimes  underbilled  so  that  the  actual  rate  is 
considerably  below  even  the  favourable  nominal  rate.  Ob- 
taining discriminating  freight  rates  has  been  charged  against 
the  Steel  Trust  also.  Although  little  evidence  of  such  dis- 
crimination has  been  furnished,  attention  has  been  called  to  the 
fact  that  the  same  men  who  are  directors  of  the  important  rail- 
roads of  the  country  are  directors  of  the  Trust.  It  is  urged 
that  it  is  not  to  be  expected  of  human  nature  that  men  so  placed 
will  not  make  one  hand  help  the  other. 

More  definite  evidence  is  forthcoming  in  reference  to  the 
second  charge,  that  is,  that  the  trusts  cut  prices  in  local  markets 
to  kill  competition,  while  they  maintain  or  raise  them  in  markets 
where  there   is   no  competition.     The   Industrial   Commission 
made  an  exhaustive  inquiry  into  the  wholesale  and  retail  prices 
paid  in  different  towns  in  different  parts  of  the  United  States 
for  petroleum,  sugar,  and  Royal  Baking  Powder.     As  a  result 
of  this  inquiry  it  seems  to  be  established  beyond  question  that 
the  Standard   Oil  Company  charges  different  prices   for  the 
same  product  at  different  points,  depending  upon  the  intensity 
of  competition.     The  investigation  showed  that  on  or  about 
February  15,  1901,  the  price  of  a  certain  standard  grade  of  re- 
fined oil  was  6  cents  per  gallon  at  Chicago,  and  5.5  cents  per 
gallon    at    Detroit,    Pittsburg,    and    other    highly   competitive 
points.     The  Chicago  price  had  been  maintained  for  some  time 
and  hence  could  fairly  be  assumed  to  cover  the  expenses  of  pro- 
duction to  the  Trust.     Taking  it  as  a  basis,  the  Report  shows 
that  at  Richmond,  Va.,  the  price  had  lately  been  cut  to  5  cents 
per  gallon  in  consequence  of  competition;  that  at  Florence, 
Ala.,  on  the  other  hand,  the  price  was  10.5  cents  although  the 
freight  rate  from  Whiting,  where  the  Standard's  large  Chicago 
refinery  is  located,  was  only  2.8  cents.     At  Little  Rock,  Ark., 
the  price  was  11.5  cents,  although  the  freight  rate  from  Whiting 
was  only  1.9  cents.     At  Denver,  Colo.,  the  price  was  16  cents, 
although  the  freight  rate  from  Whiting  was  only  4.9  cents. 
Similar  discrepancies  were  found  at  other  points,  and  although 
special  circumstances  may  doubtless  explain  .some  of  them,  it 


Unfair  Contracts  with  Dealers  493 

seems  proved  beyond  a  doubt  that  the  poHcy  of  the  Company 
is  as  alleged.  Inquiry  in  reference  to  the  price-making  prac- 
tices of  the  other  trusts  was  less  conclusive.  Direct  interroga- 
tion of  some  managers  indicated,  however,  that  the  practice  of 
making  special  prices  to  fit  special  localities  was  not  only 
common,  but  that  it  was  looked  upon  as  entirely  proper 
and  defensible.  Mr.  White,  president  of  the  National  Salt 
Company,  said  that  "  Naturally,  his  company  sold  low  where 
there  was  competition  and  recouped  itself  off  of  the  general 
market."  Evidence  was  presented  indicating  a  similar  policy 
on  the  part  of  the  Continental  Tobacco  Company.  Thus  it 
was  claimed,  and  admitted  by  the  president  of  the  company, 
that  the  American  Beauty  cigarettes  were  sold  in  North  Caro- 
lina and  Virginia  for  $1.50  per  thousand,  with  2  per  cent,  off 
for  cash,  while  the  same  brand  was  sold  in  New  York  for  a 
much  higher  price.  Critics  of  the  Trust  alleged  that  the  cut 
was  part  of  an  effort  to  drive  out  the  Carolina  Bright  ciga- 
rettes manufactured  by  a  rival  company.  This  the  Continen- 
tal Company  denied,  asserting  that  the  cigarettes  referred  to 
were  sold  for  less  than  the  Government  tax  for  the  purpose 
merely  of  introducing  the  brand.  As  a  result  of  its  inquiry 
the  Industrial  Commission  concluded,  "  that  it  is  prob- 
able .  .  .  that  the  acknowledgment  of  similar  practices 
would  be  made  by  managers  of  other  combinations,  but  such 
testimony  has  seldom  been  given." 

The   third   charge,   that   is,   that   some   of   the  trusts   con-  Unfair 
strain  jobbers  and  local  dealers  to  boycott  other  products,  can-  Contracts 
not  be  said  to  be  proved  in  any  large  number  of  cases.     This  Dealers 
may  be  due,  however,  to  the  difficulty  of  getting  the  interested 
parties  to  testify,  rather  than  to  the  infrequency  of  such  prac- 
tices.    Two  cases  were  investigated  at  some  length  by  the  In- 
dustrial  Commission.     It   was   claimed,   and   admitted   by   an 
officer  of  the  company,  that  the  Eastman  Kodak  Company, 
acting  as  agent  for  the  General   Aristo  Company,  sold  the 
goods  of  the  latter  association  at  a  15  per  cent,  trade  discount 
and   an   additional   discount   of    12   per  cent,   to   dealers   who 
handled  only  such  goods.     It  was  even  admitted  that  the  East- 
man  Company   would  probably   not  sell   to  dealers   handling 
rival  products.     The  other  case  was  that  of  the  Continental 


494  Trusts  in  the  United  States 

Tobacco  Company,  which  was  charged  with  forbidding  re- 
tailers who  handled  its  brands  of  tobacco  from  dealing  in  other 
brands.  It  may  readily  be  seen  how  a  company  controlling  a 
large  number  of  the  favourite  brands  of  a  commodity  like  to- 
bacco might,  by  pursuing  this  policy,  prevent  the  public  from 
acquiring  a  taste  for  other  brands.  As  regards  commodities 
which  are  to  a  less  extent  matters  of  taste,  limiting  dealers  to 
trust  products  might  not  be  of  any  particular  aid  to  a  trust 
in  preserving  its  monopoly. 

It  needs  no  extended  argument  to  prove  that  a  trust  resort- 
ing to  the  kinds  of  competition  described  above  may  make  its 
position  well-nigh  impregnable  so  long  as  it  contents  itself 
with  the  modest  monopoly  profit  of  48  per  cent.,  which  the 
Standard  Oil  Company  distributed  to  its  stockholders  in  1900 
and  1901.  Such  practices  are  as  demoralising  in  their  in- 
fluence upon  business  and  the  standards  of  business  men  as 
are  discriminations  on  the  part  of  the  railroads  of  the  coun- 
try, and  like  the  latter  they  should  be  prevented  at  whatever 
cost  to  the  Government. 
The  §  273.  The   view  expressed   in   Mr.   Havemeyer's   striking 

tlie  Trusts  phrase,  "the  protective  tariff  is  the  mother  of  trusts,"  merits 
some  consideration.  His  argument  is  that  the  higher  duties 
charged  on  many  products  in  the  tariffs  of  1883,  1890,  and 
1897  permitted  a  margin  of  profit  to  domestic  producers 
which  encouraged  the  reckless  duplication  of  plants  and  ruin- 
ous competition.  To  escape  the  latter,  trusts  were  organised. 
If  the  tariff  had  not  guaranteed  immunity  from  foreign  com- 
petition, no  one  would  have  cared  to  embark  his  capital  in 
them.  Once  established,  as  a  result  of  the  artificial  condi- 
tions created  by  the  tariff,  the  trusts  enjoy  advantages  over 
their  competitors  whenever  that  tariff  is  changed.  In  the 
United  States  sweeping  changes  in  the  tariff  w-ere  made  in 
1890,  1894,  and  1897.  The  changes  were  specially  marked 
in  the  case  of  sugar.  The  Sugar  Trust,  even  though  it  may 
have  had  no  influence  in  determining  the  changes  made  in  the 
sugar  schedule,  enjoyed  the  advantage  of  more  intimate  ac- 
quaintance with  what  was  going  on  in  Congress,  and  of  a  vast 
capital  with  which  to  make  the  most  of  the  changes  that  were 
foreseen. 


Other  Evils  Connected  with  Trusts      495 

That  some  of  the  trusts  in  the   United   States  have  been  JJie 
encouraged  and  fostered  by  the  protective  tariff  few  will  deny.  Moihti  of 

It  is  even  T>robal)le  that  some  of  them  have  grown  up  in  in-  ^^'^me 

.  Trusts 

dustries  which  would  not  have  flourished  at  all  but  for  the 

tariff.  Others,  doubtless,  would  not  have  been  established 
had  not  the  tariff  been  high  enough  to  protect  them  from 
foreign  competition.  At  the  same  time  it  is  equally  certain 
that  many  of  the  trusts  have  been  organised  in  industries  that 
are  in  no  wise  dependent  upon  the  tariff.  Some  of  the  latter, 
notably  the  Standard  Oil  Company,  have  enjoyed  greater  suc- 
cess for  a  longer  period  than  any  of  the  tariff-made  trusts.  If 
further  proof  of  the  independent  origin  of  trusts  is  needed  it 
may  be  found  in  free-trade  England  where  trusts  are  not 
unknown,  althougli  undoubtedly  less  numerous  than  in  the 
United  States.  Air.  Havemeyer's  dictum  ought  probably  to 
be  changed  to  the  statement  that  "  the  tariff  is  the  mother  of 
some  trusts."  Wherever  such  maternity  can  be  established  a 
modification  of  the  tariff  may  prove  a  sufficient  means  of  con- 
trol, but  it  is  also  true  that  some  of  the  tariff-made  trusts  have 
outgrown  their  leading-strings  and  have  now  little  to  fear 
from  foreign  competition. 

§  274.  Among  other  evils  charged  against  the  trusts  three  Other 
merit  special  attention :  they  are  overcapitalised,  they  cor-  Overcapi- 
rupt  public  officials,  and  they  ask  excessive  prices  for  their  talisation 
products.  In  Section  268  abundant  evidence  was  given  of  the 
tendency  to  overcapitalisation.  Trust  organisers  themselves 
do  not  deny  that  the  combinations  are  capitalised  often  for 
two  or  three  times  the  value  of  the  tangible  property  which 
goes  into  them.  They  justify  such  overcapitalisation  on  the 
ground  that,  in  addition  to  this  tangible  property,  there  are 
patents,  the  good  will  of  the  business,  and  the  probable  appre- 
ciation of  certain  kinds  of  property,  such  as  mineral  lands,  to 
be  considered.  They  urge  further  that  the  basis  of  capitalisa- 
tion should  be  not  tangible  assets,  but  earning  power.  As  re- 
gards most  of  the  trusts  there  is  no  doubt  that,  even  if  full  al- 
lowance is  made  for  intangible  assets,  earning  power,  etc., there 
still  remains  a  large  amount  of  nominal  capitalisation  for 
which  there  is  no  equivalent  in  present  or  prospective  value. 
Many   trust    promoters    frankly   admit   the    overcapitalisation 


49^  Trusts  in  the  United  States 

complained  of,  and  take  their  stand  on  the  proposition  that 
overcapitaHsation  harms  no  one.  They  argue  that  it  is  in- 
different whether  the  nominal  capitalisation  of  a  business  is 
$1,000,000  or  $2,000,000.  If  in  the  former  case  its  stock  is 
quoted  at  par,  in  the  latter  case,  they  assume,  it  will  be  quoted 
at  50  per  cent,  of  par,  and  the  only  result  will  be  that  two 
shares  are  regarded  as  one  share  would  have  been,  had  the 
capitalisation  been  more  conservative.  Such  apologists  for 
overcapitalisation  overlook  important  aspects  of  the  ques- 
tion. While  it  is  true  that  if  all  of  the  facts  in  the  case  were 
known  to  all  of  the  parties  interested,  it  would  make  little 
difference  what  the  nominal  capitalisation  might  be,  this  is 
far  from  true  when,  as  is  usually  the  case  with  the  trusts, 
knowledge  of  the  essential  facts  is  confined  to  a  small  group 
of  directors.  At  least  three  evils  may  be  traced  to  over- 
capitalisation :  It  leads  to  the  wholesale  swindling  of  the  in- 
vesting and  speculating  public  which  still  believes,  in  spite  of 
many  sad  experiences,  that  the  par  value  of  stock  bears  some 
relation  to  its  real  value.  It  invites  the  deception  of  officials 
charged  with  the  enforcement  of  tax  laws.  When  nominal 
capitalisation  throws  no  light  on  the  value  of  corporate  prop- 
erty for  purposes  of  taxation,  there  is  every  opportunity  for 
those  interested  to  deceive  assessors  as  to  the  real  value  that 
ought  to  be  taxed.  Finally,  it  encourages  mismanagement  on 
the  part  of  the  company  itself.  However  much  the  stock  of  a 
company  may  be  watered,  it  is  but  natural  that  its  responsible 
officers  should  desire  to  pay  dividends.  In  the  effort  to  per- 
form this  often  impossible  task  they  are  apt  to  adopt  lines  of 
policy  of  which  they  would  not  have  thought  had  the  business 
been  conservatively  capitalised  and  only  reasonable  earnings 
demanded  of  it.  In  the  case  of  the  trusts  such  mismanagement 
has  injured  the  public  as  well  as  stock-holders  in  the  enter- 
prises affected. 
Corruption  The  second  evil,  that  is,  the  corruption  of  public  officials,  is 
Ofl&ciais  by  no  means  confined  to  the  trusts,  but  with  them  it  assumes 
special  significance.  Trust  managers  have  been  accused  of 
influencing  legislation  through  contributions  to  campaign 
funds,  of  securing  the  election  or  appointment  of  officials 
favourable  to  their  interests,  of  bribing  attorneys-general  to 


Excessive  Prices  for  Trust  Products     497 

refrain  from  enforcing  anti-trust  acts,  and  even  of  corrupt- 
ing courts  charged  with  the  interpretation  and  enforcement  of 
adverse  laws.  Proof  of  these  accusations  is  rarely  forthcom- 
ing, but  this  is  believed  to  be  rather  because  those  possessing 
such  proof  have  every  interest  to  withhold  it  than  because  the 
accusations  are  altogether  unfounded.  As  the  control  of  the 
trusts  and  the  railroads  of  the  country  comes  to  be  concen- 
trated in  fewer  and  fewer  hands,  their  corrupt  political  in- 
fluence is  only  too  likely  to  increase  unless  vigorous  steps  are 
taken  to  curb  it. 

The  claim  that  the  trusts  charge  excessive  prices  for  their  Excessive 
products  is  also  difficult  of  direct  proof.  So  many  and  such  r^f^^^l^ 
diverse  influences  affect  the  prices  of  commodities  that  it  is  Products 
almost  impossible  for  those  unfamiliar  w^ith  every  detail  of 
the  business  concerned  to  judge  whether  a  given  price  is  or  is 
not  excessive.  Notwithstanding  these  difficulties,  an  interest- 
ing investigation  into  the  influence  of  the  trusts  on  prices  was 
made  by  Professor  Jenks  on  behalf  of  the  Industrial  Commis- 
sion. His  conclusions  were,  on  the  whole,  distinctly  adverse 
to  the  contention  of  trust  apologists  that  they  reduce  prices  in 
consequence  of  the  great  economies  they  are  able  to  realise. 
In  the  most  notable  instance  of  lowered  prices  under  trust 
management,  that  of  refined  oil,  it  appeared  that  the  reduction 
was  less,  on  the  whole,  than  the  decline  in  the  price  of  crude 
oil.  and  consequently  that  the  margin  retained  by  the  trust 
to  cover  its  expenses  of  production  and  profit  was  larger  than 
it  had  been  before  the  trust  was  organised.  The  dividends 
paid  by  the  Standard  Oil  Company  afford  indirect  support  to 
this  conclusion.  Another  case  carefully  investigated  was  that 
of  refined  sugar.  Here  it  appeared  that  the  margin  between 
the  price  of  the  raw  and  the  refined  product  fluctuated,  but  that, 
on  the  whole,  the  margin  was  reduced  only  as  competition  on 
the  part  of  independent  refiners  became  severe,  and  that  as 
soon  as  a  new  combination  was  effected  it  was  increased  so  as 
to  afford  larger  profits  to  the  Trust.  Inconclusive  though  the 
above  evidence  is,  its  trend  harmonises  with  what  was  to  be 
expected  on  general  principles.  The  trusts  are  organised  for 
profit.  One  of  the  advantages  claimed  for  them  by  their  pro- 
moters is  control  over  prices.    To  the  extent  that  they  exercise 


498  Trusts  in  the  United  States 

monopoly  powers,  self-interest  will  lead  them  to  obey  the  prin- 
ciples governing  monopoly  price.  When  economies  in  produc- 
tion do  really  result  from  their  form  of  organisation,  they 
may  find  it  advantageous  not  to  raise  prices,  or  even  to  lower 
them  somewhat,  in  order  to  enlarge  the  volume  of  their  sales, 
or  to  discourage  competition.  They  will  not,  however,  find 
it  to  their  interest  to  lower  prices  to  a  point  which  deprives 
them  entirely  of  monopoly  profit,  as  competitive  businesses  are 
forced  to  do  by  the  stress  of  competition.  It  may  be  concluded 
that  the  desire  of  the  trusts  is  to  maintain  prices  at  a  monopoly 
level,  and  that  if  they  fail  to  do  so  it  is  because  they  have  not 
the  monopoly  powers  claimed  for  them  by  their  organisers. 
What  the  effect  of  trusts  generally  upon  prices  may  be  is 
thus  bound  up  with  the  question  as  to  whether  the  trusts  gen- 
erally succeed  in  actually  controlling  the  branches  of  produc- 
tion in  which  they  are  organised,  or  whether  they  prove  to  be 
promoters'  enterprises,  which  make  little  real  difference  in  the 
competitive  situation.  It  is  quite  clear  from  the  earnings  of 
some  of  the  trusts  that  they  have  maintained  prices  comfort- 
ably above  their  expenses  of  production.  The  small  earnings 
of  others  is  equally  eloquent  proof  of  their  failure  to  control 
the  priced  on  which  their  success  depends. 
The  Con-  §  275.  Attempts  to  correct  by  means  of  legislation  abuses 

Obstacle^^  charged  against  the  trusts  have  encountered  a  familiar  obstacle 
to  Legal  in  the  United  States — constitutional  limitations  on  the  legisla- 
of^^^^  ^'^^  tive  power.  Under  the  American  form  of  government  con- 
Trusts  trol  over  industrial  enterprises  is  shared  between  the  Federal 
and  the  State  governments.  The  Constitution  of  the  United 
States  provides  that  Congress  shall  have  control  over  com- 
merce between  the  States.  In  interpreting  this  clause,  the 
Supreme  Court  has  defined  interstate  commerce  as  "  inter- 
course and  traffic  between  the  citizens  or  inhabitants  of  differ- 
ent States,"  including  "  not  only  the  transportation  of  persons 
and  property  and  the  navigation  of  public  waters  for  that 
purpose,  but  also  the  purchase,  sale,  and  exchange  of  com- 
modities." It  has  further  held  that  a  failure  on  the  part  of 
Congress  to  regulate  such  intercourse  and  traffic  in  a  particu- 
lar way  ie  to  be  taken  as  a  declaration  that  such  regulation  is 
deemed  inexpedient,  and  that  the  States  are  therefore  debarred 


The  Common  Law  499 

from  interference.  With  equal  definitcness  the  court  has  indi- 
cated what  is  not  inckided  in  interstate  commerce.  It  has  said 
very  clearly  that  the  business  of  manufacturing,  among  other 
things,  IS  not  so  included.  As  a  consequence  of  the  interstate 
commerce  clause  of  the  Federal  Constitution,  and  the  interpre- 
tation given  it  by  the  Supreme  Court,  a  peculiar  situation  has 
arisen.  Congress  has  been  unable  to  exercise  any  efficient 
control  over  the  trusts  because  their  primary  purpose  is  manu- 
facturing, and  the  interstate  commerce  in  which  they  are 
engaged  can  be  so  carried  on  as  to  evade  any  prohibition  yet 
devised,  except  such  as  would  act  as  a  serious  check  upon  busi- 
ness generally.  The  States,  on  their  side,  have  full  power  to 
control  the  trusts  as  manufacturing  corporations,  but  may  not 
interfere  with  any  interstate  commerce  in  which  they  are 
interested.  Thus  a  State  can  prevent  a  corporation,  organised 
as  a  trust,  from  carrying  on  manufacturing  within  its  limits, 
but  it  cannot  prevent  a  corporation  having  its  plants  in  other 
States  from  shipping  its  goods  to  dealers  within  the  first 
State  and  selling  them,  as  the  latter  would  be  an  interference 
with  interstate  commerce.  Under  these  circumstances,  efifect- 
ive  control  of  the  trusts  by  the  States  can  only  be  secured 
when  all  are  ready  to  unite  on  similar  laws  having  this  object 
in  view.  Up  to  the  present  time  little  progress  towards  such 
united  action  appears  to  have  been  made.  As  an  offset  to  the 
drastic  anti-trust  laws  of  some  of  the  States,  others  and  notably 
New  Jersey,  Delaware,  and  West  Virginia,  have  deliberately 
liberalised  their  corporation  laws  so  as  to  afiford  an  asylum  for 
the  trusts  for  the  sake  of  the  large  revenue  that  is  to  be 
obtained  from  them.  Before  considering  the  ways  in  which 
the  country  may  hope  to  free  itself  from  this  dilemma,  some- 
thing should  be  said  of  the  common-law  aspects  of  the  ques- 
tion. 

Legal  basis  for  a  certain  amount  of  control  over  the  trusts  The 
is  found  in  the  common  law.  It  has  long  been  held  that  cer-  l^^^ 
tain  "  contracts  in  restraint  of  trade  "  are  unenforceable  at  law 
and  that  "  monopoly  "  itself  is  unlawful.  Historically.  "  a 
contract  in  restraint  of  trade,"  in  the  legal  sense,  is  a  contract 
under  which  one  party  undertakes  not  to  engage  in  a  certain 
occupation  under  certain  conditions.     Not  even  all  such  con- 


500  Trusts  in  the  United  States 

tracts  are  unlawful,  and  but  for  the  fact  that  American  courts 
are  inclined  to  stretch  the  phrase  so  as  to  include  under  it  all 
contracts  having  monopoly  as  their  object,  the  prohibition 
would  have  little  significance  for  the  trusts.  The  phrase 
"  monopoly  "  has  also,  regarded  historically,  a  restricted  mean- 
ing. It  denotes  exclusive  privileges  confirmed  by  charter,  or 
"  legal  monopoly."  Here,  again,  American  courts  have  shown 
a  tendency  to  break  away  from  the  historical  meaning  of  the 
word  and  to  use  it  in  its  proper  economic  sense.  Although 
there  is  some  difference  of  opinion  among  judges  as  to  the 
scope  of  the  common-law  prohibitions  against  contracts  in 
restraint  of  trade  and  monopoly,  the  tendency  seems  clearly 
to  be  to  extend  these  terms  to  the  more  objectionable  practices 
of  the  trusts.  Many  go  so  far  as  to  say  that  the  common  law 
furnishes  a  complete  remedy  for  the  trust  problem  so  far  as  the 
trusts  present  a  problem. 
Anti-tmst  §  276.  Anti-trust  acts  were  passed  in  Kansas,  Maine,  and 
Michigan  in  the  year  1889.  Congress  followed  in  1890  with 
the  so-called  "  Sherman  Anti-trust  Law."  Other  State  leg- 
islatures were  not  slow  to  fall  in  with  the  precedents  so  estab- 
lished, and  by  July  i,  1902,  twenty-seven  of  the  Common- 
wealths had  anti-trust  acts  on  their  statute  books.  Some  of 
these,  like  the  Illinois  Act  of  1893,  have  been  declared 
unconstitutional  on  the  ground  that  they  impose  undue  re- 
straints on  personal  liberty.  The  Federal  Anti-trust  Act 
declares  specifically  that  "  every  contract,  combination  in  the 
form  of  a  trust  or  otherwise,  or  conspiracy,  in  restraint  of 
trade  or  commerce  among  the  several  States,  or  with  foreign 
nations,"  is  illegal,  and  that  "  every  person  who  shall  monop- 
olise, or  attempt  to  monopolise,  or  combine,  or  conspire  with 
any  other  person  or  persons  to  monopolise  any  part  of  the 
trade  or  commerce  among  the  several  States  or  with  foreign 
nations,  shall  be  deemed  guilty  of  a  misdemeanour."  This 
prohibition,  although  intended  to  prevent  industrial  combina- 
tions, has  been  so  interpreted  by  the  courts  that  it  only  in  rare 
instances  applies  to  them.  The  original  form  of  trust  has  been 
declared  unlawful  and  suppressed  and  pooling  contracts 
between  competing  manufacturers  have  been  judged  unen- 
forceable ;  but  all  efforts  to  apply  the  Act  to  trusts  organised  as 


The  Ohio  Act  of  1898  501 

separate  corporations  have  thus  far  failed.  As  already  stated, 
the  courts  define  interstate  commerce  in  such  a  way  as  to  dis- 
tinguish sharply  from  manufacturing-  and  other  industries 
those  businesses  concerned  with  the  actual  transportation  and 
exchange  of  commodities.  One  result  of  this  definition  has 
been  that  the  Act,  which  was  aimed  at  the  trusts,  has  been 
interpreted  so  as  to  apply  chiefly  to  railroads  and  trade  unions. 

The  anti-trust  acts  of  the  States  have  been  even  more  sw^eep- 
ing  in  their  provisions.  Thus  the  Ohio  statute,  which  went 
into  efifect  July  i,  1898,  and  which  has  been  widely  copied, 
declares : 

"  That  a  trust  is  a  combination  of  capital,  skill,  or  acts  by  The 
two    or    more    persons,    firms,    partnerships,    corporations,    or  ^^  ^g  g 
associations  of  persons,  or  of  any  two  or  more  of  them  for 
either,  any,  or  all  of  the  following  purposes : 

'"i.  To  create  or  carrv'  out  restrictions  in  trade  or  commerce. 

"  2.  To  limit  or  reduce  the  production,  or  increase,  or  reduce 
the  price  of  merchandise  or  any  commodity. 

"  3.  To  prevent  competition  in  manufacture,  making,  trans- 
portation, sale,  or  purchase  of  merchandise,  produce,  or  any 
commodity. 

"  4.  To  fix  at  any  standard  or  figure,  whereby  its  price  to 
the  public  or  consumer  shall  be  in  any  manner  controlled  or 
established,  any  article  or  commodity  of  merchandise,  produce, 
or  commerce  intended  for  sale,  barter,  use,  or  consumption  in 
this  State. 

"  5.  To  make  or  enter  into  or  execute  or  carry  out  any  con- 
tracts, obligations  or  agreements  of  any  kind  or  description, 
by  which  they  shall  bind  or  have  bound  themselves  not  to  sell, 
dispose  of  or  transport  any  article  or  any  commodity,  or  any 
article  of  trade,  use,  merchandise,  commerce  or  consumption 
below^  a  common  standard  figure  or  fixed  value,  or  by  which 
they  shall  agree  in  any  manner  to  keep  the  price  of  such 
article,  commodity  or  transportation  at  a  fixed  or  graduated 
figure,  or  by  which  they  shall  in  any  manner  establish  or  settle 
the  price  of  any  article,  commodity  or  transportation  between 
them  or  themselves  and  others,  so  as  to  directly  or  indirectly 
preclude  a  free  and  unrestricted  competition  among  themselves, 
or  any  purchasers  or  consumers   in  the  sale  or  transportation 


502  Trusts  in  the  United  States 

of  any  such  article  or  commodity,  or  by  which  they  shall  agree 
to  pool,  combine  or  directly  or  indirectly  unite  any  interests 
that  they  may  have  connected  with  the  sale  or  transportation  of 
any  such  article  or  commodity,  that  its  price  might  in  any 
manner  be  affected.  Every  such  trust  as  is  defined  herein  is 
declared  to  be  unlawful,  against  public  policy  and  void." 
Futility  If  this  clause  were  literally  interpreted,  the  act  would,  as 

trust  Acts  ^las  been  well  said,  prohibit  the  most  ordinary  forms  of  busi- 
ness contracts.  It  proceeds  on  the  assumption  that  combina- 
tion is  contrary  to  public  policy  and  attempts  the  impossible 
task  of  restoring  the  world  to  that  stage  of  industrial  develop- 
ment in  which  every  producer  was  independent  and  a  com- 
petitor of  every  other  producer.  Fortunately  the  courts  have 
not  attempted  literal  enforcement,  but  in  their  efforts  to  give 
this  and  similar  acts  a  reasonable  interpretation  they  have  de- 
prived them  of  much  of  their  significance.  The  experience  of 
Texas,  which  succeeded  in  excluding  the  Standard  Oil  Com- 
pany as  a  corporation  only  to  have  one  of  the  paid  agents  of 
the  latter  come  in,  nominally  as  a  private  individual,  and  secure 
a  large  interest  in  the  Beaumont  oil  field,  is  fairly  typical  of 
that  of  other  States.  It  is  the  sober  conviction  of  most 
students  of  trust  legislation  that  the  attempt  to  suppress  the 
trusts  has  proved  futile.  Armed  with  New  Jersey  charters, 
the  trusts  have  been  able,  by  fair  means  or  foul,  to  maintain 
themselves  in  most  markets  against  the  most  stringent  anti- 
trust acts.  In  the  light  of  this  experience,  the  opinion  is 
becoming  general  that  the  solution  of  the  trust  problem  lies 
not  in  repression,  but  in  regulation. 
The  §  o'/j.  The  period  of  prosperity  which  ushered  in  the  trusts 

Status  of  organised  in  1898  and  1899  has  continued  since  (July  i,  1903) 
the  Trusts  ^lVlA  this  makes  any  expression  of  opinion  in  regard  to  their 
power  to  withstand  adversity  hazardous.  One  of  the  most 
interested  observers  of  the  movement,  Mr.  Charles  M.  Schwab, 
the  first  president  of  the  United  States  Steel  Corporation, 
has  declared  emphatically  that  the  trust  which  attempts  to 
realise  profits  by  maintaining  or  advancing  prices,  instead  of 
by  so  perfecting  its  methods  of  production  that  it  can  under- 
sell its  competitors,  is  foredoomed  to  failure.  His  own  com- 
bination gave  point  to  this  view  during  the  years   1901   and 


Present  Status  of  Trusts  503 

1902  by  consistently  opposing  even  such  advances  in  the 
prices  of  its  products  as  conchtions  seemed  to  warrant, 
and  by  taking  other  measures  to  prove  to  would-be  competitors 
that  cheap  production,  rather  than  monopoly,  was  what  it 
aimed  at.  An  example  of  the  opposite  policy  has  been  afforded 
by  the  Copper  Trust  (the  Amalgamated  Copper  Company), 
whose  managers  attempted  to  maintain  the  price  of  copper  at 
the  high  level  it  attained  during  a  period  of  active  demand 
without  much  regard  to  the  decreased  consumption  and  in- 
creased production  which  naturally  resulted.  The  sensational 
collapse  of  that  Trust  in  December,  1901,  seems  to  confirm 
Mr.  Schwab's  opinion.  Of  the  older  trusts,  the  American 
Sugar  Refining  Company  seems  far  from  master  of  the  situa- 
tion in  the  sugar  industry,  the  American  Tobacco  Company  is 
encountering  active  competition,  and  even  the  Standard  Oil 
Company  finds  its  stock  quoted  (July  1,1903)  some  $200  under 
the  highest  price  it  has  commanded.  In  nearly  every  branch 
of  industry  in  which  trusts  have  been  organised,  moreover, 
the  number  of  independent  producers  has  increased,  and 
indications  point  to  a  recurrence  of  savage  competition  when 
the  present  period  of  prosperity  comes  to  an  end  and  depres- 
sion once  more  forces  curtailment  of  production  through  the 
familiar  process  of  elimination.  It  would  be  premature  to 
conclude  from  these  facts  that  the  monopolistic  powers  of  the 
trusts  are  on  the  wane.  Most  of  them  look  with  slight  con- 
cern on  independent  rivals  so  long  as  their  own  sales  continue 
large  and  remunerative.  When  depression  comes  they  will 
be  tempted  to  adopt  more  aggressive  tactics  against  their  com- 
petitors, and  only  then  can  it  be  decided  how  far  they  still 
dominate  the  situation. 

An  important  forward  step  was  taken  by  Congress  in  con-  Reports 
nection  with  the  creation  (Act  of  February  14.  1903)  of  the  De-  Required 

partment  of  Commerce  and  Industrv.    The  Bureau  of  Corpora-  ^7  .■       1 
^  -  ,  .       ,M-  National 

tions,  included  in  this  department,  is  charged  "to  make  diligent  Govern- 

investigation  into  the  organisation,  conduct  and  management  "^<^"t 
of  the  business  of  any  corporation,   joint  stock  company,  or 
corporate  combination  engaged  in  commerce  among  the  sev- 
eral States  or  with  foreign  nations,   excepting  common  car- 
riers,    .     .     .     and  to  gather  such   information  and  data  as 


504 


Trusts  in  the  United  States 


Plans  for 
Obtaining 
Legal  Con- 
trol over 
the  Trusts 


will  enable  the  President  of  the  United  States  to  make  recom- 
mendations to  Congress  for  legislation  for  the  regulation  of 
such  commerce.*'  The  Commissioner  of  Corporations,  placed 
at  the  head  of  this  bureau,  is  given  the  same  ample  powers  in 
reference  to  the  subpoenaing  of  witnesses,  the  examination  of 
books,  etc.,  as  are  enjoyed  by  the  Interstate  Commerce  Com- 
mission. Finally,  the  publication  of  the  information  collected 
rests  in  the  discretion  of  the  President  of  the  United  States. 
It  is  too  early  to  venture  an  opinion  as  to  the  success  that  is 
likely  to  attend  this  effort  to  exercise  surveillance  over  the 
trusts.  If  they  decline  to  furnish  information  on  the  ground 
that  they  are  not  engaged  in  interstate  commerce,  the  issue  will 
be  squarely  placed  before  the  people  of  the  United  States, 
whether  corporations  which  are  national  in  the  scope  of  their 
operations  shall  be  permitted  to  escape  national  regulation. 
On  the  other  hand,  if  they  pursue  the  safer  course  and  submit 
such  reports  as  the  Commissioner  of  Corporations  requires, 
a  fund  of  information  will  be  collected  withm  a  few  years  on 
the  basis  of  which  more  positive  efforts  at  regulation  may 
confidently  be  undertaken, 

§  278.  Under  the  system  of  divided  powers  created  by  the 
Federal  Constitution,  three  possible  ways  of  dealing  with  the 
trusts  appear  to  be  open.  The  plan  which,  if  feasible,  would 
be  most  certain  to  attain  the  desired  object  would  be  for  Con- 
gress and  the  State  legislatures  to  enact  concurrent  laws 
which  would  subject  both  the  commercial  and  the  manufac- 
turing aspects  of  these  businesses  to  similar  restrictions.  As 
already  suggested,  little  progress  has  as  yet  been  made  in 
this  direction  because  of  the  diverse  interests  which  the  differ- 
ent States  have  in  the  trusts.  It  may  be  dismissed  as  imprac- 
ticable. A  second  plan  for  dealing  with  the  trusts  is  to  leave 
their  regulation  entirely  to  the  States.  Congress  has  power 
to  control  interstate  commerce,  and  may,  therefore,  it  is  held, 
delegate  such  control  to  the  State  legislatures.  If  armed  with 
full  power  over  industrial  combinations,  the  States,  it  is 
claimed,  would  be  able  to  solve  the  trust  problem  independ- 
ently. This  proposal  is  open  to  the  same  objection  as  the  pre- 
ceding plan,  and  is  also  distinctly  retrogressive.  One  of 
the  chief  reasons  for  assigning  to  Congress  control  over  inter- 


Control  by  Federal  Government        505 

state  commerce  was  experience  of  the  narrow  and  selfish  poU- 
cics  the  States  pursued  so  long  as  such  control  was  left  to 
them.  To  return  to  this  condition  of  affairs,  even  with  respect 
to  the  trusts,  would  be  unendurable.  On  these  grounds  this 
plan,  also,  may  be  dismissed  as  inadequate. 

Alternative  to  the  proposal  to  vest  exclusive  control  of  the  Such 
trusts  in  the  State  legislatures  is  the  third  plan,  that  of  giving  should  be 
such  control  to  Congress.     This  might  be  accomplished,  of  Exercised 

bv  tllG 

course,  by  constitutional  amendment,  but  it  is  generally  agreed  Federal 
that,  at  least  for  the  present,  an  amendment  having  this  object  Cov- 
in view  would  have  little  chance  of  enactment.  In  lieu  of  this 
direct  method,  Congress  might  obtain  control  over  the  trusts 
by  forcing  them  to  incorporate  under  a  Federal  statute  in 
which  were  prescribed  such  conditions  as  were  deemed  desir- 
able. The  powers  under  which  Congress  might  legally  com- 
pel the  trusts  to  become  national  corporations  are  various. 
It  might  declare  that  no  corporation  without  a  Federal  charter 
could  engage  in  interstate  commerce.  Even  the  ingenuity  of 
corporation  lawyers  would  find  it  difficult  to  evade  such  a  pro- 
hibition as  regards  some  phases  of  the  business  in  which  every 
trust  is  engaged.  If  this  policy  seemed  too  drastic,  it  might 
impose  a  prohibitive  tax  upon  the  interstate  traffic  of 
State  corporations,  as  was  done  to  force  State  banks  issuing 
notes  to  become  national  banks.  Or  it  might  make  incorpora- 
tion under  the  Federal  statute  a  condition  to  the  enjoyment  by 
a  corporation  of  the  protection  of  the  patent  laws,  which  is  an 
important  privilege  to  most  of  the  trusts.  Finally,  it  might 
proceed  against  State  trusts  as  it  proceeded  against  lotteries, 
by  forbidding  to  them  the  use  of  the  mails.  It  can  hardly  be 
doubted  that  through  one  or  other  of  these  measures  all  corpo- 
rations engaged  in  business  which  extended  beyond  the  limits 
of  a  single  State  might  be  compelled  to  subject  themselves  to 
national  regulation.  The  most  serious  objection  to  such  reg- 
ulation is  that  when  it  was  once  entered  upon  it  could  not  stop 
until  control  over  business  relations,  which  in  the  American 
scheme  of  government  has  been  vested  in  the  States,  was 
transferred  almost  in  its  entirety  to  Congress.  Such  a  large 
proportion  of  the  business  of  the  country  is  now  conducted  by 
corporations,  and  such  a  large  proportion  of  the  corporations 


5o6 


Trusts  in  the  United  States 


Voluntary 
Federal 
Incor- 
poration 
Advocated 


The  Regu- 
lation 
Needed 


extend  their  field  of  operations  beyond  the  limits  of  a  single 
State,  that  the  policy  considered  would  enormously  increase 
the  powers  of  Congress  at  the  same  time  that  it  reduced  to 
very  low  terms  the  powers  of  the  States.  Many  persons  shrink 
from  such  a  radical  departure  from  inherited  traditions  in 
reference  to  State  rights  and  local  self-government.  Natural 
as  is  this  feeling  it  seems  destined  to  give  way  to  the  growing 
sense  of  national  industrial  solidarity  and  the  conviction  that 
businesses  w'hich  are  national  in  their  scope  must  be  regulated, 
if  regulated  at  all,  by  national  authority.  Only  in  this  way, 
it  is  believed,  can  the  best  interests  of  the  W'hole  people  be 
safeguarded.  This  last  plan  of  regulation  appears,  therefore, 
to  be  the  only  one  that  is  both  practicable  and  adequate  to  the 
situation. 

Although  not  prepared  to  advocate  compulsory  incorpora- 
tion under  a  Federal  statute,  many  writers  believe  that  the 
trusts  should  be  given  the  opportunity  of  national  incorpora- 
tion. In  pursuance  of  this  idea,  Mr.  F.  J.  Stimson,  counsel  of 
the  Industrial  Commission,  has  drawn  up  the  first  section  of 
a  proposed  national  act  of  incorporation,  which  reads  as  fol- 
lows :  "  Any  corporation  engaged  in  interstate  commerce,  or 
any  number  of  citizens  of  the  United  States  desirous  of  form- 
ing a  corporation  for  the  purpose  of  engaging  in  interstate 
commerce,  either  by  transportation  of  persons  or  property  or 
by  other  traffic  or  commerce  among  the  States,  may  be  organ- 
ised as  a  Federal  corporation  under  this  Act,  and  as  such  may 
sue  or  be  impleaded  in  the  Federal  courts,  and  such  corpora- 
tions shall  not  be  subject  to  taxation  under  the  laws  of  any 
State,  except  as  to  property  actually  within  such  State."  Mr. 
Stimson  believes  that  the  privileges  extended  in  the  last  clauses 
would  induce  many  of  the  trusts  to  submit  themselves  even  to 
rather  rigid  regulations.  This  proposal  offers  a  safe  means 
of  testing  the  readiness  with  which  the  trusts  would  subject 
themselves  to  reasonable  regulations,  and  ought  perhaps  to  be 
acted  upon  before  any  more  radical  step  looking  towards  na- 
tional incorporation  and  national  control  is  taken. 

Assuming  the  trusts  to  be  brought  squarely  under  Congres- 
sional control,  as  are  the  national  banks  and  the  interstate 
railways,  we  must  consider  the  regulations  which  ought  to  be 


The  Future  of  the  Trusts  507 

applied  to  them.     What  these  are  was  suggested  in  what  was 
said  of  the  illegitimate  practices  of  the  trusts. 

The  most  important  reform  would  be  to  so  supplement  the  Suppres- 
prohibitions  of  the  Interstate  Commerce  Act  that  discrimina-  Piactices 
tions  on  the  part  of  the  railroads  in  favour  of  the  trusts  would  Leading  to 

TJnf3.ir 

altogether  cease.  This  might  be  accomplished  perhaps  by  com- 
making  proof  of  the  acceptance  of  such  discrimination  valid  petition 
l^^round  for  the  withdrawal  of  the  charter  of  a  Federal  corpora- 
tion. The  second  prohibition  should  apply  to  the  making  of 
■discriminating  prices  either  as  regards  different  localities  or  as 
regards  different  purchasers.  The  trusts  might  be  required 
to  submit  their  price  lists  to  the  Commissioner  of  Corpora- 
tions or  some  body  similar  to  the  Interstate  Commerce  Com- 
mission might  be  created  to  determine  whether  such  prices 
•were,  comparatively  speaking,  just  and  reasonable,  and  there- 
fore lawful.  Finally,  contracts  under  which  dealers  were 
required  to  boycott  other  than  trust-made  goods  should  be 
prohibited,  and  machinery  should  be  created  for  making  such 
prohibition  effective.  If  all  of  these  measures  were  taken, 
unfair  competition,  which  has  too  often  characterised  the  prac- 
tices of  the  trusts  in  the  past,  might  be  suppressed. 

In  addition  to  subjecting  the  trusts  to  control,  as  suggested  Reform 
above,  it  would  seem  to  be  desirable  for  Congress  to  revise  the  ^^  Trust 
tariff  so  as  to  subject  monopolistic  combinations  to  the  whole-  Products 
some  stimulus  of  foreign  competition.     Such  changes  are  espe- 
cially called  for  in  the  case  of  trusts  which  have  secured  con- 
trol of  the  important  sources  in  the  United  States  of  the  raw 
materials  which  they  use,  as  have,  for  example,  the  United 
States  Steel  Corporation  and  the  International   Paper  Com- 
pany.    These  businesses  have  many  of  the  characteristics  of 
natural  monopolies  so  long  as  they  are  protected  from  foreign 
competition,  and  for  this  reason  to  withdraw^  the  protection  of 
which  they  are  the  beneficiaries  would  seem  to  be  along  the  line 
of  sound  public  policy. 

§  279.  The  general  uneasiness  excited  by  the  growth  of  the  The 
trusts  during  the  earlier  years  of  the  movement  has,  in  the  ^jjg  Trusts 
light  of  experience,  somewhat  abated.     It  is  now  recognised 
that  the  trust  form  of  organisation  is  adapted  to  rather  a  lim- 
ited number  of  businesses,  and  that  only  in  a  few  cases  can 


5o8  Trusts  in  the  United  States 

combination  actually  succeed  for  any  length  of  time  in  sup- 
pressing competition.  At  the  same  time,  the  reasons  for  the 
success  of  those  trusts  which  have  succeeded  are  coming  to  be 
more  generally  understood  and  public  opinion  is  being  edu- 
cated to  discriminate  between  the  legitimate  and  illegitimate 
practices  of  the  combinations.  The  future  of  the  trusts  in  the 
'  United  States  depends  very  largely  upon  the  promptness  with 

which  unfair  methods  of  competition  are  prevented.  If  effect- 
ive measures  are  taken  to  prevent  rate  discriminations  on  the 
part  of  the  transportation  companies,  and  price  discriminations 
and  unfair  contracts  with  retailers  on  the  part  of  the  trusts 
themselves,  it  is  believed  that  the  movement  towards  combina- 
tion will  be  checked,  and  that  such  combinations  as  continue 
to  be  effected  will  have  back  of  them  reasons  not  opposed  to 
public  policy.  In  the  course  of  time  some  of  the  so-called 
industrial  combinations  are  likely  to  evolve  into  out-and-out 
natural  monopolies.  The  Anthracite  Coal  Combine  appears 
already  to  have  reached  that  stage  of  development.  If  the 
opinion  of  the  officials  of  the  company  is  to  be  accepted,  the 
United  States  Steel  Corporation  is  already  virtually  a  natural 
monopoly  as  regards  both  its  essential  materials — iron  ore  and 
coking  coal.  Perhaps  the  International  Paper  Company  is 
destined  also  to  become  a  natural  monopoly.  In  all  such  cases 
the  public  interest  demands,  not  only  publicity  and  fair  dealing 
towards  competitors  as  in  the  case  of  the  trusts  generally,  but 
also  power  such  as  the  Interstate  Commerce  Commission  has, 
or  ought  to  have,  in  connection  with  railway  rates,  to  insist  on 
just  and  reasonable  prices. 
Power  of  The  most  effective  weapon  wielded  by  the  public   for  dealing 

tion  a     '       "with  the  trusts,  as  with  other  actual  and  potential  monopolies, 

Weapon        is    the    consumer's    power    to     substitute    other    goods     for 

for 

Controlling  those  which  the  trusts  enhance  in  price.     As  consumption  and 

Monopolies  processes  of  production  become  more  varied  in  their  range,  this 
power  acquires  wider  scope.  It  already  effectually  precludes 
excessive  profits  to  any  very  large  number  of  businesses  and 
limits  the  monopoly  problem  to  those  few  services  and  com- 
modities which  remain  indispensable  to  civilised  existence,  such 
as  transportation  facilities,  coal,  iron,  petroleum,  salt,  sugar,  etc. 
As  time  goes  on,  invention  and   discovery  may  still   further 


Consumers'  Weapon  against  Trusts     509 

narrow  the  list  of  such  articles  and  services,  but  probably  never 
to  such  an  extent  as  to  make  the  monopoly  problem  one  of 
little  importance  to  the  economist. 

JiEFERENCES  FOR   COLLATERAL   READING 

*  Jenks,  The  Trust  Problem;  Report  of  United  States  Industrial 
Commission, Vols.  I.,  II.,  XIII.,  and  XVIII.;  *Meade,  Trust  Finance; 
von  Halle,  Trusts  or  Industrial  Combinations  in  the  United  States; 
*Clark,  Control  of  Trusts;  Gtenton,  Trusts  and  the  PwhWc;  Nell leton. 
Trusts  or  Competition;  Report  of  Chicago  Conference  on  Trusts 
(The  Civic  Federation,  i8qq);  IJoyd,  Wealth  aia^ainst  Common, 
wealth;  Tarbell,  The  History  of  the  Standard  Oil  Company; 
Montague,  The  Standard  Oil  Company;  *  Fetter,  Principles  of 
Economics,  Chaps.  34  and  35;  Ripley,  Trusts,  Pools  and  Corners. 


CHAPTER  XXVI 


PLANS    OF   ECONOMIC    REFORM 


Four 
Plans  of 
Ecouomic 
Reform 


Profit- 
Sharing 


Objections 
to  the 
Sliding- 
scale 
System 


§  280.  The  industrial  system  which  has  been  described  and 
analysed  in  the  preceding  chapters  leaves  much  to  be  desired. 
We  have  now  to  consider  different  plans  that  have  been  sug- 
gested for  its  reform  and  to  decide  how  far  they  are  practi- 
cable. Because  of  limitations  of  space,  we  must  confine  our 
survey  to  the  four  proposals  that  seem,  at  the  present  time,  to 
merit  most  serious  consideration,  that  is,  profit-sharing,  labour 
copartnership,  land  nationalisation,  and  socialism. 

§281.  One  criticism  urged  against  the  present  industrial 
system  is  that  workmen,  upon  whose  labour  and  fidelity  the 
success  of  business  undertakings  so  largely  depends,  receive  no 
share  of  profits.  Wages  constitute  usuall}-  their  sole  compensa- 
tion, whether  the  entrepreneur  who  employs  them  is  reaping 
large  gains  or  incurring  losses.  To  give  workmen  a  keener 
interest  in  their  work  various  expedients  have  been  devised, 
all  of  which  may  be  described  as  forms  of  profit-sharing. 

One  of  the  simplest  methods  of  profit-sharing  is  that  which 
causes  wages  to  vary  on  a  sliding  scale  with  the  price  of  the 
product.  This  has  long  been  common  in  the  mining  and  iron 
and  steel  industries  of  Great  Britain,  and  is  not  unusual  in  the 
same  industries  in  the  United  States.  It  is,  however,  open  to 
grave  objections,  unless  standard  rates  of  wages  are  estab- 
lished as  a  rainirnum  below  which  earnings  are  not  to  be 
depressed,  no  matter  how  low  the  price  of  the  product  may  be- 
come. In  every  branch  of  industry  prices  are  subject  to  varia- 
tion and  tend  at  times  to  fall  below  the  normal  expenses  of  pro- 
duction. The  force  which  is  relied  upon  to  restore  them  at 
such  periods  is  the  unwillingness  of  entrepreneurs  to  continue 
production  at  a  loss.  Under  the  sliding-scale  system,  wages,  a 
principal  item  among  the  expenses  of  production,  fall  as  prices 
fall.     The  consequence  may  be  that  entrepreneurs  can  still 

510 


Objections  to  Sharing  Losses  511 

produce  at  a  profit  even  when  the  price  is  too  low  to  afford  a 
fair  return  to  wage-earners.  Under  such  circumstances  the 
force  relied  upon  to  restore  prices  is  removed  and  they  may  for 
some  time  remain  below  the  level  which  permits  a  fair  com- 
petitive return  to  all  parties.  Of  course,  w'orkmen  wil! 
gradually  withdraw  from  such  poorly  paid  employments,  and 
in  this  way  the  equilibrium  may  in  time  be  restored,  but  it  is 
also  possible  that  in  the  interval  whole  groups  may  suffer  a 
permanent  lowering  of  their  earning  capacities  and  standards 
of  living.  A  sliding-scale  method  of  remuneration  w^hich  has 
not  as  its  basis  minimum  wages  is  thus  a  menace  to  the  per- 
manent well-being  of  the  wage-earning  class.  Another  ob- 
jection to  the  sliding  scale  is  that  it  assumes  a  constancy  of 
relation  between  the  price  of  the  product  and  the  amount  of 
the  profits  that  does  not  in  fact  exist.  Thus,  anthracite  coal- 
mine owners  in  the  United  States  objected  to  the  application 
of  the  system  to  that  industry  by  the  award  of  the  Strike  Com- 
mission already  referred  to,  on  the  ground  that  their  expenses 
of  production  were  growing  each  year  heavier  as  the  mines 
grew  deeper,  and  that  higher  prices  in  the  future  would  add 
nothing  to  their  profits  and  consequently  give  rise  to  no  fund 
to  be  shared  with  their  employees.  Whether  this  position  was 
justified  in  this  particular  case  or  not,  there  can  be  no  doubt 
tliat  changes  in  prices  are  too  inaccurate  indices  of  changes  in 
profits  to  permit  the  extension  of  the  sliding-scale  system  to 
many  branches  of  business. 

A  less  objectionable,  if  more  complex,  method  of  sharing  Objections 
profits  is  for  the  entrepreneur  to  appraise  his  own  services  as  ^  ^''^^'°^ 
worth  a  certain  wages  of  management  and  to  agree  to  distrib- 
ute all  profits  above  this  sum  to  his  emplovees — including  him- 
self  as  salaried  manager — in  proportion  to  the  wages  which 
they  respectively  receive.  Such  a  distribution  of  profits,  if 
fairly  carried  out,  offers  the  highest  incentive  to  all  employees 
to  contribute  their  maximum  to  the  success  of  the  business. 
If  anything,  it  errs  on  the  side  of  being  overgenerous  to  work- 
men, since  they  are  guaranteed  their  wages  whether  there  are 
any  profits  to  distribute  or  not,  whereas  the  wages  of  man- 
agement of  the  entrepreneur  can  be  paid  only  w^hen  profits 
equal  at  least  to  this  amount  have  been  realised.     To  obviate 


512  Plans  of  Economic  Reform 

this  difficulty  it  has  sometimes  been  attempted  to  scale  down 

wages  proportionately  when  losses  result  in  businesses  which 

have  adopted  the  practice  of  sharing  profits.     Logical  as  such 

a  plan  may  seem,  it  is  open  to  the  fundamental  objection  that 

it  makes  workmen  suffer  for  the  mistakes  of  their  employers. 

So  long  as  the  former  have  no  voice  in  the  management  of  the 

business  in  which  they  are  engaged,  they  may  rightly  demand 

standard  wages.     If  the  employer  is  willing  to  offer  them  in 

addition  a  share  of  his  profits,  they  should  and  usually  will 

show  their  appreciation   by   attending  more   carefully   to   his 

interests.     They  should  not  be  asked  to  share  losses,  however, 

as  this  would  interfere  with  that  elimination  of  unfit  employers 

upon  which  progress  so  largely  depends. 

Other  Besides  the  plans  for  sharing  profits  described  above,  there 

Plans  of  ,  ,       ,  ,  .  ,  r  ,      •  T 

Profit-  a^'e  dozens  of  others  of  varymg  degrees  of  complexity,     in 

Sharing  mercantile  trade  it  is  not  unusual  to  compensate  salesmen  with 
a  certain  percentage  of  their  gross  sales  in  addition  to  their 
salaries.  Corporations  are  increasingly  in  the  habit  of  paying 
bonuses  to  their  employees  out  of  the  profits  of  each  year's 
business.  Several  of  them  have  introduced  elaborate  plans, 
such  as  that  of  the  United  States  Steel  Corporation,  for  selling 
stock  to  their  employees  on  favourable  terms  and  paying  them 
a  premium  in  addition  to  the  usual  dividend  on  condition  that 
they  retain  the  stock  and  with  it  an  interest  in  the  success  of 
the  enterprise.  Some  of  these  plans  have  been  adopted  upon 
humanitarian  grounds,  but  most  of  them  are  simply  enlight- 
ened expedients  for  increasing  the  interest  which  hired  work- 
men feel  in  the  quality  and  quantity  of  their  work.  Modern 
business  is  a  vast  system  of  co-operation,  and  the  principal 
criticism,  from  the  point  of  view  of  production,  that  is  to  be 
urged  against  it  is  that  the  co-operation  is  so  often  grudging 
and  half-hearted.  Profit-sharing  is  a  device  for  bridging  over 
the  gulf  between  employers  and  employees  by  making  the  in- 
comes of  both  depend  directly  upon  the  amount  of  profits. 
When  adopted  as  a  supplement  to  the  payment  of  wages  at 
standard  rates  it  merits  only  commendation.  It  increases  the 
productiveness  of  labour  by  giving  workmen  a  livelier  interest 
in  the  results  of  their  toil.  It  adds  to  wages  and  thus  permits 
workmen  to  attain  to  higher  standards  of  living  at  the  same 


Labour  Copartnership  513 

time  that  it  facilitates  the  accumulation  by  them  of  capital. 
iMnally,  it  renders  the  relations  between  employers  and  em- 
ployees more  cordial,  and  in  this  way  prevents  strikes  and  lock- 
outs. Those  who  object  to  profit-sharing  do  so  on  the  ground 
that  it  is  a  mere  palliative,  when  what  is  needed  is  a  radical 
change  in  the  present  industrial  system.  To  judge  of  the 
soundness  of  this  criticism  we  must  pass  to  a  consideration  of 
other  plans  of  economic  reform. 

§  282.  Labour  copartnership,  or  "  co-operation,"  as  it  is  fre-  Labour  Co. 
quently  styled,  goes  a  step  further  than  profit-sharing  by  mak-  ^^i^^^^^^' 
ing  workmen  partners  in  the  businesses  in  which  they  are 
employed.  It  is  a  plan  for  dispensing  with  the  services  of  the 
entrepreneur,  or  the  risk-taker,  and  substituting  for  him  a 
group  of  partners  who  both  direct  and  carr>^  out  the  undertak- 
mgs  in  which  they  are  engaged.  Up  to  the  present  time  labour 
copartnership  has  succeeded  best  in  connection  wath  trade,  and 
especially  retail  trade.  A  brief  description  of  its  development 
in  Great  Britain,  where  it  has  enjoyed  widest  extension,  will 
serve  to  introduce  a  discussion  of  its  strong  and  weak  features. 

Successful  labour  copartnership  in  England  may  be  said  to  In  Great 
date  from  the  year  1844,  when  the  famous  Rochdale  co-oper- 
tive  store  was  founded  by  the  twenty-eight  "  Rochdale  pio- 
neers." As  the  same  form  of  organisation  has  been  adopted 
by  other  co-operative  stores  in  all  parts  of  Great  Britain  since, 
a  brief  description  of  this  store  may  be  given.  The  needed 
capital  was  obtained  by  the  issue  of  £1  shares  to  subscribing 
members,  and  on  this  investment  5  per  cent,  interest  was 
regularly  paid  before  profits  were  divided.  Anyone  might 
become  an  ordinary  member  on  the  payment  of  one  shilling 
and  was  then  entitled  to  trade  at  the  store  and  receive  a  share 
of  the  profits  proportionate  to  the  amount  of  his  purchases. 
The  prices  charged  were  about  the  same  as  those  asked  for 
similar  goods  in  other  stores  and  cash  payments  were  required. 
Thus  the  advantage  to  the  purchaser  was  the  receipt  every 
quarter  of  his  share  of  the  profits  and  the  assurance 
that  he  was  not  being  cheated  in  reference  either  to  the 
quality  of  the  goods  bought  or  their  prices.  From  a  very 
small  beginning  the  Rochdale  store  has  grown  to  be  a  great 
enterprise.      Within    thirty    years    the    number    of    members 


514 


Plans  of  Economic  Reform 


The 


Wholesale 
Society 


increased  to  nearly  8000,  the  capital  to  nearly  £200,000,  the 
gross  business  to  nearly  £300,000  and  the  annual  profits  to 
over  £40,000.  The  progress  since  1874  has  been  continuous, 
and  several  manufacturing  enterprises  have  been  started  and 
are  now  run  in  connection  with  the  Store  and  its  branches. 
There  has  been  but  one  flaw  in  this  development,  and  that  is 
the  abandonment  by  the  Society  of  any  pretence  of  dividing 
profits  with  employees.  Its  relations  with  the  latter  are  like 
those  of  an  ordinary  business  corporation,  the  co-operative 
feature  being  limited  strictly  to  customers. 

The  remarkable  success  of  co-operative  retail  stores 
operative  modelled  after  the  Rochdale  experiment  emboldened  the 
leaders  of  the  movement  to  establish  in  1864  the  English 
Co-operative  Wholesale  Society  for  the  purpose  of  buying 
jointly  for  retail  co-operative  stores  on  more  favourable  terms 
than  they  could  secure  by  dealing  with  ordinary  wholesalers 
and  jobbers.  The  Wholesale  was  a  success  from  the  very 
start.  By  1901  it  had  a  membership  of  over  1000  retail 
societies  and  a  capital  of  nearly  £2,500,000,  while  its  sales 
amounted  to  more  than  £7,500,000  and  its  profits  to  nearly 
£335,000.  From  buying  its  goods  by  wholesale  from  other 
manufacturers  the  Society  soon  passed  to  manufacturing  for 
itself  upon  an  extensive  scale.  It  is  now  engaged  in  the 
manufacture  of  biscuits,  cocoa,  butter,  preserves,  sweets, 
boots  and  shoes,  soap,  candles,  woollen  goods,  ready-made 
clothing,  flour,  lard,  furniture,  shirts,  mantles,  and  undercloth- 
ing, and  it  docs  its  own  printing  and  that  of  many  of  its  mem- 
bers. In  its  management  of  its  manufacturing  establishments, 
it,  too,  has  pursued  the  policy  of  the  ordinary  business  corpora- 
tion. It  pays  good  wages,  but  it  accords  to  its  employees 
neither  voice  in  the  direction  of  the  enterprises  in  which  they 
are  engaged  nor  share  in  the  profits.  This  fact  must  not  be 
overlooked  when  the  success  of  the  English  Wholesale  Society 
is  cited  as  proof  of  the  possibilities  of  labour  copartnership. 

In  1868  The  Scottish  Co-operative  Wholesale  Society  was 
launched  on  the  model  of  its  English  predecessor.  Its  man- 
agers two  years  later  introduced  a  profit-sharing  feature, 
which  has  been  retained  ever  since  and  to  which  the  superior 
success  of  the  Scottish  Society  is  by  some  attributed.     In  1901 


The 

Scottish 

Society 


Labour  Copartnership  in  the  United  States  515 

the  Scottish  Society  had  over  600  members  and  a  capital  of 
over  £1,500,000;  its  sales  agg^rcgated  over  £5,700,000  and  its 
]irofits  nearly  £250,000.  When  it  is  remembered  that  the 
population  of  Scotland  is  less  than  one-seventh  that  of  Eng- 
land the  significance  of  these  figures  is  evident. 

In  addition  to  the  two  wholesale  societies  described  there  Present 
were  in  Great  Britain  in  1901,  1462  co-operative  retail  societies,  Labour 
or  "  stores,"  with  a  membership  of  nearly  1,800,000,  a  share  Copartner- 
capital  of  £22,000,000  and  profits  aggregating  over  £8,260,000. 
Besides  these  co-operative  trading  societies  there  were  a  num- 
ber of  co-operative  productive   associations  in   England   and 
Scotland  in  that  year.     Of  these,  136  were  manufacturing  and 
30  were  agricultural.     The  combined  membership  of  both  was 
less  than  35,000,  however,  and  the  profits  on  the  year's  busi- 
ness were  only  £187,000.. 

In  contrast  with  this  remarkable  development  of  labour  co-  Reasons 

T  T   •     JO  i"^  Back- 

partnership  in  Great  Britain  there  are  m  the   United  States  hardness 

but  a  few  successful  co-operative  experiments.  In  mining  of  the 
districts  and  in  factory  towns  successful  co-operative  stores  states 
are  not  unknown  and  in  fanning  regions,  especially  in  the 
Middle  West,  co-operative  creameries  are  found,  but  taken 
altogether  these  experiments  affect  as  yet  but  a  small  part  of 
the  business  that  is  regularly  carried  on  in  the  country.  The 
reasons  for  this  slight  development  are  to  be  sought  partly  in 
the  peculiar  industrial  conditions  of  the  United  States  and 
])artly  in  the  circumstances  that  have  confined  the  spread  of 
labour  copartnership,  even  in  Great  Britain,  to  trade  and  a  few 
branches  of  manufacturing.  Co-operative  activity  implies  a 
certain  degree  of  homogeneity  of  thought  and  feeling  on  the 
part  of  a  population  and  this  is,  for  obvious  reasons,  less  de- 
veloped in  the  United  States  than  in  the  older  countries  of 
Europe.  It  also  requires  a  willingness  to  incur  a  good  deal  of 
trouble  for  the  sake  of  the  petty  economies  that  are  to  be  real- 
ised from  dispensing  with  the  middleman  in  business,  and 
American  workmen  have  not  yet  reached  the  point  when  they 
are  willing  to  take  this  trouble.  As  time  goes  on  local  and 
national  obstacles  to  the  progress  of  the  movement  will  give 
way,  but  there  will  remain  the  circumstances  that  everywhere 
limit  labour  copartnership  to  a  few  industries. 


5i6  Plans  of  Economic  Reform 

Reasons  Co-operative  stores  are  able  to  succeed  because  the  service 

and  Failure  they  render  is  of  a  very  simple  character.  They  are  sure  of 
of.Co-oper-  their  customers.  They  may  insist  on  cash  payments  and  in 
perimeuts  this  way  avoid  losses  through  unwise  extensions  of  credit. 
They  need  little  initial  capital  and  can  usually  obtain  this 
without  difficulty  from  the  savings  of  workmen  themselves. 
Through  the  growth  of  co-operation  in  retail  trade,  the  "  co- 
operative wholesale  "  is  made  possible,  and  through  it  in  turn 
certain  co-operative  manufacturing  industries  may  be  devel- 
oped. The  English  Co-operative  Wholesale  Society  has,  as 
already  remarked,  failed  to  apply  the  principle  of  labour  co- 
partnership to  its  relations  with  the  employees  in  its  manu- 
facturing departments,  and  the  reason  for  its  policy  are  not  far 
to  seek.  Successful  manufacturing  requires  intelligent  and 
progressive  management  and  large  capital.  Workmen  rarely 
appreciate  the  importance  of  the  first  or  are  in  a  position  to 
supply  the  second.  The  consequence  is  that  only  in  excep- 
tional cases  does  labour  copartnership  succeed  in  manufactur- 
ing. When  the  capital  is  forthcoming,  there  is  almost  certain 
to  be  before  long  a  disagreement  in  regard  to  the  business 
management.  As  submission  to  the  judgment  of  the  salaried 
manager  must,  in  the  nature  of  the  case,  be  entirely  voluntary, 
disagreement  is  only  too  apt  to  lead  to  insubordination  and  dis- 
ruption. Even  when  capable  managers  are  secured,  therefore, 
efficient  control  of  a  labour  copartnership  can  hardly  be  main- 
tained for  any  great  length  of  time.  But  the  chances  are 
strongly  against  securing  efficient  managers  because  the  work- 
men partners  usually  object  to  paying  sufficiently  high  salaries. 
The  common  view  was  tersely  expressed  at  an  English  co- 
operative congress  by  a  delegate  who  declared  he  had  never 
yet  seen  a  man  whose  services  were  worth  £500  a  year. 
With  such  an  opinion  of  the  value  of  business  organisation 
and  management  labour  copartners  must  soon  be  worsted 
in  competition  with  independent  entrepreneurs.  The  diffi- 
culties in  the  way  of  securing  capital  for  enterprises  which 
require — as  do  many  branches  of  manufacturing — investments 
of  more  than  $1000  for  each  employee  are  obvious.  Few 
workmen  have  so  much  to  invest,  and  those  who  have  are 
likely  to  be  particularly  timid  about  risking  it  in  untried  fields. 


Land  Nationalisation  517 

On  the  other  hand,  few  capitaHsts  care  to  lend  their  savings 
to  labour  copartners. 

Labour  copartnership  is  an  admirable  substitute  for  the  The 
competitive  system  whenever  and  wherever  it  can  succeed.  It  Laf^ou^r^Co- 
appeals  to  higher  motives  than  mere  self-interest  and  its  in-  partnersliip 
fluence  upon  the  character  of  those  who  engage  in  it  is  broad- 
ening and  ennobling.  As  time  goes  on  its  extension  to  ever 
wider  fields  may  be  confidently  hoped  for,  but  such  exten- 
sion must  necessarily  be  gradual.  All  of  the  conditions  upon 
which  its  successful  operation  depends — a  fuller  appreciation 
by  workmen  of  the  value  of  the  services  of  business  managers 
and  organisers,  a  willingness  on  their  part  to  take  orders  from 
bosses  of  their  own  choosing,  and  finally  an  accumulation  by 
them  of  capital — must  be  of  slow  growth.  This  does  not  lessen 
in  the  least  the  importance  of  labour  copartnership  as  a  plan 
of  economic  reform,  but  it  shows  the  extent  to  which  the 
present  industrial  system  is  adjusted  to  the  character  and  at- 
tainments of  the  average  man  of  the  present  day  and  em- 
phasises the  truth  that  it  can  be  displaced  only  as  the  average 
man  is  raised  to  a  higher  plane  of  thought,  feeling,  and 
efficiency. 

§  283.  Profit-sharing  and  labour  copartnership  are  plans  of  Land 
reform  that  may  be  and  have  been  introduced  without  any  sation"^  *' 
change  in  law  or  in  the  functions  of  the  state.  Their  ex- 
tension depends  upon  purely  voluntary  methods,  and  their  suc- 
cess may  be  gauged  by  their  ability  to  hold  their  own  in  com- 
petition with  other  forms  of  business  organisation.  Quite 
different  is  land  nationalisation,  the  plan  of  reform  now  to  be 
considered,  since  it  proposes  a  fundamental  change  in  the 
present  industrial  system,  the  abolition  of  private  property  in 
land.  The  grounds  for  this  proposal  have  already  been  sug- 
gested in  the  analysis  of  production  presented  in  earlier  chap- 
ters. As  there  shown,  one  of  the  factors  in  the  creation  of 
wealth  is  land  and  the  natural  powers  associated  with  it. 
These  are,  broadly  speaking,  gifts  of  nature  to  man  whose 
services  contribute  a  share  to  the  value  of  the  product  dis- 
tinguishable in  thought  from  the  shares  due  to  labour  and  to 
capital.  In  return  for  these  services  the  income  which  we 
have  called  rent  is  paid  to  landowners.     In  the  view  of  ad- 


5i8 


Plans  of  Economic  Reform 


Advan- 
tages of 
Private 
Property 
in  Land 
in  Great 
Britain 


In  the 

United 

States 


vocates  of  land  nationalisation  this  income  is  ''  unearned  "  by 
the  private  landowners  who  receive  it  and  ought  in  justice  to 
be  diverted  to  the  use  of  the  whole  community,  either  by  means 
of  taxation  or  through  the  outright  confiscation  of  land  by  the 
Government.  In  order  to  determine  the  merits  of  this  plan  of 
reform  we  must  consider  the  grounds  which  have,  to  the  minds 
of  thoughtful  persons,  justified  the  system  of  private  prop- 
erty in  land  for  so  many  centuries  and  the  results  that  would 
be  likely  to  follow  such  a  radical  change  as  that  proposed. 

Private  property  in  land  was  adopted  in  Great  Britain  after 
centuries  of  experience  of  a  kind  of  communal  ownership. 
The  latter  was  found  to  be  deadening  to  enterprise  and  prog- 
ress because  it  compelled  the  adoption  of  uniform  methods  of 
cultivation  by  the  members  of  each  rural  community  and  be- 
cause it  offered  no  adequate  incentive  to  those  large  plans  of 
improvement,  such  as  the  draining  of  marshes  and  the  intro- 
duction of  artificial  fertilisers,  to  which  English  agriculture 
has  owed  so  much.  It  is  true  that  the  system  has  had  its  dark 
side  in  that  the  transition  to  it  afforded  an  opportunity  for 
much  fraud  and  injustice,  and  in  that  it  has  resulted  in  the  for- 
mation of  great  hereditary  estates  owned  by  absentee  land- 
lords. Even  with  these  drawbacks,  however,  it  is  believed 
that  the  introduction  of  private  property  in  land  has  resulted 
in  national  gain,  and  if  measures  had  been  taken,  as  they  might 
easily  have  been,  to  prevent  these  evil  results,  the  beneficence 
of  the  change  would  not  admit  of  question. 

Even  without  the  precedents  established  by  European  coun- 
tries, it  is  highly  probable  that  the  early  settlers  of  America 
would  have  adopted  private  property  in  land  as  the  only  sys- 
tem adapted  to  the  conditions  of  a  new  country.  To  attract 
colonists  it  was  necessary  to  oft'er  them  every  inducement. 
Guaranteeing  them  in  the  ownership  of  such  land  as  they 
were  able  to  reclaim  from  the  wilderness  and  defend  from  the 
Indians  seemed  a  small  enough  return  for  the  hardships  and 
privations  which  they  were  required  to  endure.  Of  course 
land  was  also  secured  at  times  on  terms  that  had  little  regard 
to  the  general  interest,  but,  on  the  whole,  the  results  of  the  sys- 
tem have  abundantly  justified  it.  Even  at  the  present  time, 
the  best  sense  of  American  statesmen  cordially  approves  tlie 


The  Situation  in  the  United  States      519 

principle  of  the  Homestead  Act,  under  wliich  settlers  may 
secure  limited  tracts  of  land  from  the  Government  practically 
free  of  charge.  The  liberal  land  policy  which  the  country 
adopted  and  has  adhered  to  from  the  earliest  period  of  settle- 
ment has  been  a  chief  factor  in  the  rapid  settlement  of  the 
American  continent.  Unwise  as  it  may  have  been  in  some  of 
its  details,  it  can  hardly  be  doubted  that  it  has  been,  in  its  main 
features,  sound  and  beneficent. 

§  284.  An  historical  justification  of  private  property  in  land  The 
is  quite  a  different  thing  from  a  demonstration  that  the  sys-  prob^g,^ 
tern  must  endure  until  the  end  of  time.  At  some  period  it  is 
quite  certain  that  this  system,  like  others  that  preceded  it,  will 
cease  to  be  adapted  to  industrial  conditions  and  will  need  to 
be  modified,  if  the  best  interests  of  society  are  still  to  be 
served.  We  have  now  to  weigh  the  truth  of  the  claim  of 
advocates  of  land  nationalisation  that  this  period  has  already 
come  for  the  countries  of  the  Western  World. 

The  principal  advantages  of  private  property  in  land  arc  Evils  of 
realised  only  when  the  owner  is  at  the  same  time  the  occupier  £'^sentee 
or  cultivator.     Under  these  conditions  self-interest  insures  in  lordism 
most  cases  the  most  economical  and  progressive  utilisation  of 
the  land  attainable.     When,  on  the  other  hand,  the  owner  is 
an  absentee  landlord,  who  leases  the  land  to  the  occupier  or 
cultivator,  it  can  make  little  difference  whether  he  is  the  ad- 
ministrator of  a  private  estate  or  an  official  of  a  well-organised 
government.     In  either  case  the  actual  use  made  of  the  land 
must  depend  upon  the  efficiency  of  the  lessor  and  the  terms 
of  the  lease.     It  follows  that  the  suitability  of  the  present  sys- 
tem of  private  property  in  land  to  present  conditions  hinges 
upon  the  question  whether  absentee  landlordism  both  in  town 
and  country  is  coming  to  be  the  rule  or  whether  this  condi- 
tion is  still  exceptional. 

Space  will  not  permit  an  exhaustive  analvsis  of  the  actual  The 

,       T  T    •      1    (-  1  'e         r  I       Situation 

Situation  even  in  the  United  i^tates,  but  a  tew  facts  may  be  in  tlie 

mentioned  as  proof  that,  in  this  countrv,  at  least,  absentee  land-  V"'^^'^ 

■      .  States 

lordism  is  still  exceptional  and  occupation  or  cultivation  by 

the  owner  the  rule.     According  to  the  census  of  1890.  jz  per 

cent,  of  the  4,565.000  separate  farms  in  the  country  in  that  year 

were  operated  by  their  owners.     The  percentage  had  decreased 


Single  Tax 


520  Plans  of  Economic  Reform 

to  65  in  1900,  but  owing  chiefly  to  an  extension  in  the  Southern. 
States  of  the  system  of  cultivation  "  on  shares  "  which  has  the 
one  advantage  that  it  insures  the  owner's  continued  interest 
in  the  methods  of  cultivation  practised  by  the  tenant. 

In  towns  and  cities  the  situation  is  far  less  favourable  to  the 
present  system  of  private  property  in  land,  although  few 
exact  figures  in  reference  to  it  are  available.  Moreover  there 
is  reason  to  think  that,  especially  in  large  cities,  absentee  land- 
lordism is  becoming  more  and  more  the  rule,  for  the  simple 
reason  that  more  and  more  people  are  coming  to  live  in 
tenement  and  apartment  houses.*  If  this  is  the  case,  there 
may  be  good  ground  for  the  contention  that  the  system  of 
private  property  in  land  is  ceasing  to  serve  any  useful  purpose 
in  cities  which  the  system  of  public  ownership  would  not  serve 
as  well  and  that  the  time  is  ripe  for  a  gradual  transition  to  the 
latter. 
The  §  285.  The  plan   for  diverting  the  income  we  have  styled 

rent  from  private  landowners  to  the  Government  that  has  at- 
tracted most  attention  in  the  United  States  is  called  by  its  ad- 
vocates "  the  single  tax,"  a  name  given  it  by  its  author,  Mr. 
Henry  George,  in  his  widely  read  book  Progress  and  Pov- 
erty. Before  we  consider  the  practical  aspects  of  the  land 
question  a  few  w^ords  should  be  said  about  this  w^ork  and  its 
proposal.  Mr.  George's  avowed  purpose  in  writing  Prog- 
ress and  Poi'crty  was  "  to  seek  the  law  which  associates 
poverty  with  progress  and  increases  want  with  advancing 
w^ealth,"  and  in  it  he  attempts  to  prove  that  this  law  results 
from  the  institution  of  private  property  in  land  which,  he 
believes,  causes  the  benefits  of  progress  to  redound  to  the  ex- 
clusive advantage  of  landowners.  Diverting  these  benefits 
to  the  whole  community  by  means  of  a  "  single  tax  "  on  land 
rent  would,  he  thinks,  "  raise  wages,  increase  the  earnings  of 
capital,  extirpate  pauperism,  abolish  poverty,  give  remunera- 
tive employment  to  whoever  wishes  it,  afford  free  scope  to 
human  powers,  lessen  crimes,  elevate  morals  and  taste  and  in- 
telligence, purify  government,  and  carry  civilisation  to  yet 
nobler  heights."     The  argument  by  which  he  arrives  at  this 

*  Already  in  New  York  City  but  one  family  in  nine  owns  its  place  of 
residence. 


Objections  to  the  Sinj^rje  Tax  521 

gratifying  conclusion  is  far  too  elaborate  to  reproduce  in  brief 
conipaLS,  and  this  is  the  less  necessary  because  there  is  no  evi- 
dence of  the  truth  of  the  law  for  which  he  seeks  an  explana- 
tion and  whose  existence  is  vital  to  his  whole  contention. 
Poverty  has  undoubtedly  persisted  in  spite  of  progress,  but 
that  it  has  increased  with  progress  is  directly  contrary  to  the 
fact.  Equally  unwarranted  is  the  assumption  on  which  his 
conclusion  rests  that  every  improvement  in  productive  power 
tends  to  increase  rents.  This  could  only  be  the  case  if  the 
population  of  each  country  had  an  absolutely  rigid  standard 
of  living  and  responded  to  every  improvement  by  multiplying 
luitil  the  margin  of  cultivation  was  lowered  to  a  point  at 
which  wages  were  no  higher  than  before.  If  such  were  the 
fact,  the  true  explanation  of  the  increase  in  rent  and  the  per- 
srstence  of  poverty  would  have  to  be  sought  not  in  the 
appropriation  of  rent  by  landlords,  but  in  the  unprogressive 
character  of  the  people  generally,  and  it  is  not  at  all  clear 
how  the  situation  would  be  helped  materially  if  all  rent  went 
to  the  Government  and  if  all  other  taxes  than  that  on  rent 
were  abolished. 

Henry  George's  extreme  claims,  both  as  to  the  need  for  a 
radical  remedy  for  present  economic  evils  and  as  to  the  bene- 
fits that  would  result  from  his  "  single  tax,"  seem  extravagant, 
even  to  the  point  of  absurdity,  but  his  proposal  ought  not 
to  be  dismissed  on  these  merely  negative  grounds.  The  influ- 
ence which  Progress  and  Poverty  has  exerted  over  its  hundreds 
of  thousands  of  readers  has  been  due,  not  to  the  novelty  or 
profundity  of  its  argument,  but  to  the  sincere  desire  to  benefit 
humanity  which  so  clearly  inspired  the  author  in  its  composi- 
tion. The  plan  suggested  should  be  considered  in  no  meaner 
spirit,  that  is,  with  sole  reference  to  its  social  utility. 

§  28C.  The  first  objection  to  the  "  single  tax  "  refers  to  the  Objections 
contention  of  its  advocates  that  it  would  prove  adequate  to  the  ^°  *  j^  rj.^^. 
fiscal  needs  of  every  community  at  every  stage  of  its  indus-  It  is 
trial  development.     The  point  would  be  of  minor  importance    "^  equate 
did   it  not  illustrate  how  largely  belief  in  the  "  single  tax  " 
rests  on  faith  rather  than  upon  reason.     As  shown  in  pre- 
vious chapters  the  amount  of  rent  depends  upon  diflFerences  in 
the  productiveness  of  different  pieces  of  land  and  the  location 


522 


Plans  of  Economic  Reform 


It  Would 
Involve 
Wholesale 
Confis- 
cation 


of  the  margin  of  cultivation.  In  a  prairie  region  differences 
in  fertility  are  much  less  marked  than  in  a  hilly  country. 
Thus,  in  equally  populous  areas  in  different  parts  of  the 
United  States,  great  differences  are  found  in  the  size  of  the 
aggregate  rent  fund.  The  needs  of  such  regions  for  revenue 
for  courts,  jails,  roads,  common  schools,  etc.,  have  little  rela- 
tion to  these  differences.  Moreover  the  more  intelligent  and 
the  more  social  the  population  becomes  the  keener  will  be  its 
appreciation  of  common  needs  and  the  larger  the  fiscal  require- 
ments of  the  government  which  ministers  to  such  needs,  but 
these  again  have  no  connection  with  the  size  of  the  rent  fund. 
It  follows  that  the  need  for  public  revenue  is  little,  if  at  all, 
related  to  the  circumstances  that  determine  the  size  of  the  rent 
fund  and  if  the  appropriation  of  that  fund  by  means  of  taxa- 
tion should,  by  chance,  just  pay  the  expenses  of  government 
at  one  time,  it  would  be  very  certain  to  fall  short  of  or  to  exceed 
the  amount  needed  for  this  purpose  at  a  subsequent  period. 
The  contention  that  a  tax  on  rent  would  by  itself  meet  all  of 
the  requirements  of  government  at  all  times  may  thus  be  dis- 
missed as  visionary.  Even  could  it  be  shown  to  be  an  excellent 
tax,  to  depend  upon  it  as  the  single  tax  would  be  the  height 
of  folly. 

The  next  objection  is  more  fundamental  and  applies  to  all 
plans  involving  the  diversion  of  land  or  the  income  it  affords 
to  the  common  benefit.  Such  policies  amount  to  confiscation 
and  can  only  be  justified  on  the  ground  that  they  are  abso- 
lutely essential  to  general  well-being.  For  centuries  the  law 
has  permitted  the  private  ownership  and  enjoyment  of  land. 
Pieces  of  land  have  changed  hands  on  the  average  dozens 
of  times  in  the  United  States,  and  present  owners  have  in 
most  cases  acquired  them  not  as  free  gifts  of  nature  nor 
as  grants  from  the  Government,  but  by  paying  for  them, 
just  as  they  have  had  to  pay  for  other  species  of  property. 
To  deprive  them  of  their  lands,  or  what  amounts  to  the 
same  thing,  of  the  income  which  these  lands  afford,  would  be 
to  commit  a  monstrous  piece  of  injustice.  Such  injustice 
might  possibly  be  countenanced  if  there  were  any  rational 
ground  for  sharing  Henry  George's  expectations  as  to  the 
results  of  such  a  policy,  but  in  the  absence  of  such  ground  it 


Conclusions  as  to  the  Single  Tax       523 

must  be  condemned  in  unqualified  terms.  It  is  preposterous 
to  suppose  that  an  era  of  social  justice  may  be  ushered  in  by 
the  deliberate  disregard  of  rights  which  the  law  has  so  long 
held  sacred.  Even  though  we  grant  that  property  in  land 
originated  in  theft — a  proposition  which  is  to  say  the  least  de- 
batable— we  must  protest  against  the  notion  that  the  thefts 
of  long  ago  are  to  be  corrected  by  the  forcible  spoliation  of 
present  owners,  whose  property  has  in  the  majority  of  in- 
stances been  honestly  bought  and  paid  for.  A  state  which 
would  thus  overturn  an  established  institution,  and  confiscate 
by  wholesale  the  property  of  its  citizens,  would  lose  the  con- 
fidence of  those  citizens  and  be  reduced  to  a  condition  of 
anarchy  bordering  on  civil  war.  Any  increase  in  public  revenue 
or  reduction  in  other  forms  of  taxation  so  secured  would  be 
bought  at  far  too  high  a  price. 

The  third  and  last  objection  to  the  single  tax  is  adminis-  Impossible 
trative  in  character.  Although  the  rent  of  land  may  be  dis-  1^^^^^'"^'^" 
tinguished  in  thought  from  interest  on  capital  invested  in  the 
land,  it  is  often  impossible  to  distinguish  it  in  practice.  As 
already  pointed  out,  permanent  improvements  to  land,  such  as 
draining  marshes,  or  filling  in  hollow  places  or  levelling  down 
elevations  to  adapt  lots  for  building  purposes,  become  indis- 
tinguishable from  the  land  itself.  For  the  government  to  ap- 
propriate the  entire  income  from  improved  land  would  be  for 
it  to  place  a  ban  upon  further  improvements.  For  it  to  ap- 
propriate only  the  true  economic  rent  would,  in  many  cases, 
be  impossible,  as  there  is  no  means  of  calculating  exactly  the 
amount  Qf  that  rent.  Thus  the  carrying  out  of  the  single-tax 
programme  is  confronted  by  serious  practical  difficulties. 

For  the  reasons  discussed,  and  others  of  less  importance,  the  Conclusions 
single-tax  programme,  as  originally  formulated  by  Henry  sjngie  Tax 
George,  has  not  received  the  endorsement  even  of  all  of  his 
avowed  followers.  The  latter  are  more  and  more  concerned 
with  the  practical  aspects  of  tax  reform  and  are  rendering  a 
valuable  service  by  forcing  upon  public  attention  the  evils  in 
the  present  situation.  The  single-tax  agitation  has  thus  be- 
come a  part  of  the  broader  movement  for  tax  reform,  the  dis- 
cussion of  which  must  be  deferred  to  Chapter  XX\TII. 

§  287.  The  last  and  most  radical  plan  of  economic  reform  Socialism 


524 


Plans  of  Economic  Reform 


Com- 
munism 


Plans 
for 

Realising 
Socialism 


is  what  we  have  designated  as  "  socialism."  As  the  term  is 
here  used,  it  refers  to  the  proposal  to  reorganise  industrial 
society  by  transferring  to  the  state,  or  its  agent,  the  govern- 
ment, control  over  land  and  the  instruments  of  production, 
which  we  have  called  capital  goods,  and  by  confining  private 
property  to  the  things  which  minister  directly  to  the  satisfac- 
tion of  wants,  that  is,  consumers'  goods.  As  owner  of  all  land 
and  capital  the  state  would  also  be  director  of  all  industrial 
undertakings.  All  business  managers  and  workmen  would 
become  government  officials,  employed  in  government  enter- 
prises and  remunerated  according  to  some  plan  prescribed  by 
the  government.  Private  initiative  and  competition  in  industry 
would  be  superseded  by  state  initiative  directed  by  the  special 
departments  of  the  government  entrusted  with  the  manage- 
ment of  industrial  affairs. 

Although  agreeing  on  these  main  points,  socialists  dififer 
widely  as  to  the  details  of  the  industrial  system  which  they 
propose  and  also  as  to  the  means  by  which  it  is  to  be  realised. 
One  group,  which  we  may  conveniently  designate  as  "  com- 
munists," advocates  an  equal  per  capita  division  of  the  prod- 
ucts of  industry,  the  latter  being  valued  in  proportion  to 
the  units  of  labour  time  involved  in  their  production.  Another 
group  recognises  that  the  needs  of  different  individuals  differ 
as  widely  as  do  productive  capacities  and  defines  as  its 
ideal  "  production  by  each  according  to  his  capacity  and  dis- 
tribution to  each  according  to  his  need."  Still  others  con- 
tent themselves  with  the  optimistic  prediction  that  under 
socialism  there  will  be  a  superabundance  of  goods  of  all  kinds 
and  that  the  problem  of  distribution  will  consequently  offer  no 
difficulties. 

As  regards  means  of  realising  socialism,  one  group,  which 
we  may  designate  as  the  revolutionary  socialists,  looks  forward 
to  a  general  uprising  on  the  part  of  the  masses  who  will  first 
obtain  control  of  the  government,  then  confiscate  all  land 
and  capital  goods,  and  finally  inaugurate  the  system  of  state- 
directed  industry.  Another  group  condemns  revolutionary 
measures  and  looks  forward  to  a  gradual  transition  to  social- 
ism through  a  step-by-step  extension  of  the  functions  of 
government,  to  be  defended  at  each  stage  not  by  any  pre- 


The  Advantages  of  Socialism  525 

conceived  preference  for  socialism,  but  by  the  exigencies  of 
each  situation.  Still  another  group  looks  for  the  new  system 
as  the  result  of  a  revolutionary,  but  entirely  voluntary  change 
approved  by  all  classes,  because  the  competitive  system  will 
have  become  intolerable.  These  differences  as  regards  both 
the  ideal  in  view  and  the  means  to  its  attainment  render  diffi- 
cult any  general  characterisation  or  criticism  of  socialism  as 
a  plan  of  economic  reform.  In  what  follows  we  must  content 
ourselves  with  reviewing  some  of  the  advantages  claimed  for 
socialism  and  some  of  the  practical  difficulties  which  oppose 
its  introduction. 

§  288.  The  advantages  claimed  for  socialism  are  both  eco-  Economic 
nomic  and  moral.  In  contrast  w^ith  the  present  system  of  tatces^'f 
production,  which  is  wasteful  and  haphazard,  it  contemplates  Socialism 
a  system  under  which  the  economic  needs  of  the  community 
will  be  accurately  estimated  and  the  available  land,  labour,  and 
capital  carefully  apportioned,  so  that  just  the  quantity  of 
each  kind  of  good  required  will  be  produced.  The  duplica- 
tion of  plants  and  the  excessive  production  of  particular  goods, 
now  so  common,  will  be  avoided,  the  expenses  of  advertising 
and  competitive  selling  will  be  saved,  and  finally  the  produc- 
tion of  ffoods  that  are  harmful  rather  than  beneficial  to  those 
who  consume  them  will  be  suspended.  As  a  consequence  of 
these  improvements  on  present  practices  there  will  be,  it  is 
claimed,  an  immense  sa\  ing  of  productive  power,  which  may  be 
utilised  either  to  add  largely  to  the  volume  of  goods  produced, 
to  shorten  the  hours  of  labour,  or  to  combine  both  advantages 
to  the  benefit  of  mankind  both  in  its  consuming  and  in  its 
producing  capacity. 

The  moral  advantages  claimed  for  socialism  are  even  more  Moral  Ad- 
noteworthy.  Instead  of  depending  upon  self-interest  as  a  spur  ^  '^'^^ 
to  industrial  activity,  socialism  relics  upon  the  love  of  activity 
for  its  own  sake,  the  desire  to  contribute  to  the  common  good, 
the  sense  of  duty  in  the  performance  of  tasks  that  are  largely 
voluntary,  and  the  ambition  to  win  social  esteem  and  social 
distinction  through  conspicuous  social  service.  It  is  labour 
copartnership  extended  and  systematised  to  embrace  the  whole 
industrial  field  and  has  the  same  moral  advantages  over  com- 
petition as  has  conscious  co-operation.     Under  socialism  all 


526 


Plans  of  Economic  Reform 


Objections 

to 

Socialism 


men  would  live  literally  as  brothers,  sharing  in  the  common 
toil,  and  enjoying  each  his  portion  of  the  fruits  of  that  toil. 

§  289.  It  is  unpleasant  to  contrast  the  socialistic  dream  as  it 
is  unfolded,  for  example,  in  such  a  work  as  Bellamy's  Look- 
ing Backzvard  with  the  hard  facts  of  life  and  of  human  nature, 
but  no  less  drastic  a  course  can  serve  to  present  in  their  true 
light  the  obstacles  in  the  way  of  the  realisation  of  socialism. 
Men  as  they  are  are  fond  of  activity  for  its  own  sake,  to  be 
sure,  but  not  usually  of  the  sort  of  activity  for  which  they  are 
best  fitted  in  their  role  as  producers  of  wealth.  If  this  motive 
were  alone  to  be  depended  upon,  not  ten  in  a  hundred  would 
be  likely  to  declare  themselves  in  favour  of  useful  forms  of 
activity.  The  other  ninety  would  content  themselves  with 
pure  play,  finding  their  satisfaction  in  it  partly,  it  must  be 
confessed,  because  it  is  entirely  dissociated  from  any  pro- 
ductive result.  The  desire  to  contribute  to  the  common  good 
would,  doubtless,  hold  a  larger  number  to  the  tasks  best  suited 
to  their  capacities,  but  the  slight  extent  to  which  this  desire  is 
developed  must  impress  anyone  who  observes  the  conduct  of 
people  towards  forms  of  public  property,  like  parks  and  mon- 
uments. The  horizon  of  the  average  man  is  still  painfully 
limited  and  the  sacrifices  he  is  willing  to  make  for  the  vague 
public  beyond  his  family  and  immediate  circle  of  friends  is 
jmall,  except  in  moments  of  excitement  when  his  social  con- 
sciousness is  aroused  out  of  its  habitual  lethargy.  The  sense 
of  duty  is  also  a  motive  that  could  not  safely  be  relied  upon  to 
hold  many  men  to  the  monotonous  daily  round  which  is  neces- 
sary to  efficient  production  in  many,  if  not  in  most  departments 
of  industry.  Finally,  the  desire  for  social  esteem  and  social 
distinction,  w^hich  is  certainly  strong  in  the  average  man,  is 
neutralised  as  a  motive  to  industrial  activity  because,  as  a 
matter  of  fact,  public  opinion  is  very  undiscriminating  in  its 
judgments.  It  rarely  accords  applause  where  and  at  the  time 
applause  is  due,  and  it  is  very  apt  to  reward  with  its  approval 
quite  unworthy  candidates  for  its  recognition.  Some  system 
of  graded  honours,  like  decorations  or  titles,  might  be  devised, 
similar  to  those  already  in  vogue  to  reward  men  for  signal 
services  on  the  field  of  battle,  but  that  these  would  hold  the 
rank  and  file  of  the  industrial  army  to  their  tasks  in  the  ab- 


Difficulties  in  the  Way  of  Socialism     527 

sence  of  other  incentives  will  hardly  be  claimed  by  anyone. 
It  is  believed  that  these  considerations  admit  of  but  one 
conclusion,  namely,  that  the  motives  to  industrial  activity  on 
which  socialism  relies  are  all  too  weak  and  that  compulsion 
would  have  to  be  called  in  to  supplement  them  if  the  system 
was  to  be  put  into  practical  operation.  But  compulsion  is 
tyranny,  and  whether  practised  by  a  selfish  despot  or  by  an 
enli.i;htenc(l  majority  seeking  only  the  general  good,  must 
react  disastrously  on  the  character  of  those  concerned  in  it. 
Until  socialism  can  be  realised  without  it  or  without  more  of 
it  than  is  now  necessary  to  keep  the  enemies  of  society  in 
order,  its  moral  superiority  over  the  present  competitive  sys- 
tem may  well  be  questioned.  At  some  future  time,  when  men 
and  women  of  a  higher  type  compose  society,  socialism  may 
prove  practicable,  but  it  does  not  seem  to  be  adapted  to 
men  and  women  as  they  now  are.  And,  it  may  be  added, 
when  human  beings  are  so  perfected  that  the  motives  on  which 
socialism  relies  are  dominant,  it  will  make  little  difference 
what  form  of  industrial  organisation  is  adopted.  Competi- 
tion among  such  individuals  will  be,  as  it  is  now  at  its  best, 
merely  a  generous  rivalry  between  upright  and  fair-minded 
men,  tempered  by  regard  for  the  interests  of  others  and  re- 
strained by  legal  prescriptions.  Such  competition  might  re- 
sult in  industrial  relations  as  ideally  perfect  as  those  pictured 
in  connection  with  socialism,  and  if  these  relations  do  not  now 
prevail  it  is  not  because  of  the  industrial  system  under  which 
we  live,  but  because  of  the  imperfections  of  the  men  and 
women  who  compose  society. 

Although  less  serious  than  the  psychological  obstacles  to  Difficulty 

the  realisation  of  socialism,  the  administrative  obstacles  are  ^^  Appor- 
.    .  tioning 

sufficiently  formidable.     A  few  of  them  only  will  be  referred  Labour 
to :  Assuming  a  population  disposed  to  give  socialism  a  fair  Ji.^'"^^    . 
trial  and  the  government  in  control  of  all  land  and  capital  cally 
goods,  a  first  difficulty  would  be  in  connection  with  the  assign- 
ment of  occupations  to  individual  citizens.     The  interests  of 
production  would  require  a  certain  quota  of  workmen  in  each 
department  of  industry.     But  how,  in  the  absence  of  compul- 
sion, could  these  quotas  be  secured?     Under  the  present  sys- 
tem the  division  is  accomplished  by  the  simple  operation  of 


528 


Plans  of  Economic  Reform 


Difficulty 
of  Valuing 
Goods 


the  law  of  demand  and  supply.  Branches  of  production  that 
are  inadequately  manned  attract  more  workers  by  offering 
them  somewhat  higher  wages  than  are  paid  in  other  occupa- 
tions. What  corresponding  inducement  could  be  offered  under 
socialism?  Is  it  not  probable  that  in  the  absence  of  compul- 
sion or  of  wages  apportioned  to  the  competitively  determined 
value  of  the  service  rendered,  certain  employments  would  at- 
tract many  more  workmen  than  were  needed  while  others 
would  be  avoided?  One  writer  has  suggested  that  the  dis- 
tribution of  the  available  labour  force  could  be  accomplished 
by  shortening  the  hours  of  employment  in  unpopular  occupa- 
tions until  they  attracted  their  quota  of  workmen.  This  might 
prove  a  workable  solution  of  the  difficulty,  but  its  practical 
operation  would  involve  obviously  a  high  order  of  administra- 
tive ability  on  the  part  of  the  directors  of  the  nation's 
industries. 

A  second  dif^culty  concerns  the  determination  of  the  values 
of  diiferent  economic  goods.  Since  these  are  produced  on 
government  account  quite  independently  of  markets  and  the 
higgling  of  markets,  such  determination  would  have  to  be 
made  through  the  application  of  some  administrative  rule. 
One  rule  proposed  is  that  each  good  be  valued  in  proportion 
to  the  labour  time  involved  in  its  production.  But  how  could 
such  labour  time  be  measured  ?  What  quality  of  labour  should 
be  selected  as  a  standard  ?  Should  the  product  of  a  day's 
labour  of  a  talented  artist  be  valued  the  same  as  the  products 
of  the  labour  of  a  machine  tender?  If  so,  will  there  not  be 
a  continuing  discrepancy  between  the  demand  for  and  the 
supply  of  the  former?  Shall  no  allowance  be  made  for  the 
part  w^hich  land  and  capital  goods  play  in  production?  The 
bare  statement  of  these  questions  suggests  the  complexity  of 
the  problem  which  would  confront  the  government  in  connec- 
tion with  the  mere  valuation  of  the  products  of  its  farms  and 
factories. 

A  third  dif^culty  concerns  the  decision  as  to  the  quantities 
Connection  of  different  goods  to  be  produced  from  year  to  year,  and  espe- 
"^''th  cially  as  to  the  proportions  of  the  labour  time  of  the  com- 

munity that  should  be  devoted  to  the  production  of  capital 
goods   and   of   consumers'   goods,    respectively.      Each   com- 


Difficulty 
in 


Capital 


Conclusion  5^9 

munity  would  have  it  in  its  power  to  neglect  entirely  the 
interests  of  the  future  by  failing  to  replace  or  add  to  its  stock 
of  capital  goods,  or  to  provide  abundantly  for  future  require- 
ments by  devoting  all  the  labour  time  not  needed  for  the  pro- 
duction of  current  necessaries  to  the  production  of  such  goods. 
What  principle  could  guide  government  officials  in  deciding 
wisely  on  this  all-important  question?  Would  they  not,  as 
elected  officers,  be  under  a  constant  temptation  to  win  popular 
favour  by  adding  to  the  current  supplies  of  goods  at  the  ex- 
pense of  the  fund  of  capital? 

Finally,  there  would  be  the  difficulty  of  deciding  as  to  the  Progress 
relative  merits  of  different  methods  of  production.  If  prog-  H"^.^^.. 
ress  were  to  continue,  improvements  on  current  methods  would 
be  constantly  necessary.  How  much  labour  time  should  be 
diverted  from  the  routine  of  production  along  old  lines  to  in- 
dustrial experiments  ?  Who  would  determine  when  an  experi- 
ment in  a  given  direction  should  be  abandoned  as  barren  of 
result?  Who  would  say  when  an  old  process  and  old  ma- 
chinery should  be  given  up  and  a  new  process  and  new  ma- 
chinery substituted  ?  In  actual  industrial  society  these  questions 
are  answered  crudely,  but  effectively,  through  the  impartial 
operation  of  competition.  The  best  process  wins  in  the  long 
run  because  it  pays  best.  Would  the  best  process  be  as  likely 
to  be  preferred  under  socialism? 

Many  other  difficulties  might  be  suggested,  but  enough  has  Conclusion 
been  said  to  indicate  the  puzzling  problems  that  would  con- 
front the  directors  of  a  socialist  state.  One  great  merit  of  the 
present  system  is  that  it  works.  In  the  absence  of  proof  one 
may  be  excused  for  doubting  whether  socialism  would  work 
in  practice.  Its  operation  would  certainly  call  for  a  grade  of 
administrative  ability  and  a  devotion  to  the  public  interest 
superior  to  any  to  be  met  with  among  elected  officials  of  the 
present  day.  Our  conclusion  from  this  brief  review  of  the  ob- 
stacles to  the  realisation  of  socialism  is  that  it  is  impracticable 
for  the  men  and  women  who  now  compose  civilised  society. 
If  the  industrial  world  is  moving  in  its  direction,  it  is  at  a  slow 
pace.  For  many  years  to  come  progress  must  consist  in  im- 
provements in  the  present  competitive  system  calculated  to 
raise  the  plane  of  competition  and  equalise  opportunities  so 


530 


Plans  of  Economic  Reform 


The 

Socialism 
of  Karl 
Marx 


Criticism 


that  the  children  of  the  poor  may  enjoy  educational  advantages 
more  nearly  equal  to  those  of  the  rich  and  the  ownership  of 
property  may  be  more  generally  diffused. 

§  290.  In  the  foregoing  sections  the  ideals  of  the  group  we 
have  styled  evolutionary  socialists  have  been  chiefiy  con- 
sidered. The  other  group,  which  we  have  styled  the  revolu- 
tionary socialists,  looks  upon  the  present  industrial  system  as 
fundamentally  unjust.  A  main  tenet  in  their  creed  is  that  the 
whole  product  of  industry  is  due  to  labour,  and  should  there- 
fore go  to  labour,  and  that  what  landlords  and  capitalists  take 
as  rent  and  interest  is  practically  stolen.  The  most  elaborate 
defence  of  this  view  is  contained  in  the  work  of  the  German 
socialist,  Karl  Marx,  entitled  Capital^  which  undertakes  to  ex- 
pose the  iniquities  of  the  present  system  and  at  the  same  time 
to  show  that  it  contains  within  itself  the  seeds  of  its  own  de- 
struction. Space  will  not  permit  a  detailed  criticism  of  this 
phase  of  socialism,  but  a  few  words  should  be  devoted  to  it 
in  closing. 

It  is  a  fundamental  error  in  analysis  to  ascribe  the  value 
of  the  products  of  industry  to  the  labour  involved  in  their 
production.  Value,  as  already  explained,  is  the  joint  result 
of  utility  and  limitation  of  the  supply.  Under  conditions 
of  free  competition  value  arises  because  of  the  cost  involved 
in  producing  goods.  This  varies  under  different  natural 
conditions  and  consequently  rent  appears.  Under  the  least 
favourable  natural  conditions  resorted  to  cost  involves  not 
only  labour,  but  also  the  sacrifice  involved  in  supplying 
the  capital  indispensable  to  efficient  production.  The  value 
of  the  product  must  be  great  enough  to  remunerate  work- 
men and  capitalists,  or  the  inducement  which  causes  those 
at  the  margin  of  doubt  between  saving  and  spending  to  save 
will  be  removed  and  the  fund  of  capital  will  be  reduced.  The 
payment  of  interest  is  as  just  and,  economically,  as  necessary 
as  the  payment  of  wages.  It  is  the  premium  industrial  society 
offers  to  those  who  will  furnish  it  with  the  capital  it  needs  and 
it  is  never  higher  than  is  necessary  to  secure  this  capital.  It 
is  true  that  much  of  the  needed  capital  would  be  furnished  if 
there  were  no  premium,  but  it  is  equally  true  that  many  work- 
men, and  especially  those  whose  work  is  of  most  value  to  so- 


Conclusion  53  ^ 

ciety,  would  work  for  nothing  rather  than  abandon  their 
chosen  professions.  In  each  case  the  reward  is  determined  by 
the  character  and  motives  of  the  marginal  men  in  the  group 
afifected.  In  each  case,  moreover,  the  necessity  of  rewarding 
these  marginal  men  gives  a  value  to  the  product  sufficient  to 
reward  at  the  same  rate  all  men  in  the  group.  The  interest 
capitalists  receive  is  in  no  sense  subtracted  from  the  reward 
that  goes  to  labour.  It  comes  from  the  extra  product  due  to 
the  assistance  which  capital  goods  render  to  production,  just 
as  the  wages  of  labour  come  virtually  from  the  products  of 
labour.  In  neither  case  is  there  any  exploitation  of  one  factor 
by  the  other.  If  this  analysis  is  accurate  the  whole  contention 
of  Marx  and  his  followers  falls  to  the  ground,  and  the  present 
industrial  system  is  cleared  of  the  charge  of  being  based  on 
the  legalised  robbery  of  the  labouring  by  the  propertied  class. 

§  291.  In  criticising  land  nationalisation  and  socialism  as  Conclusion 
plans  of  economic  reform,  there  has  been  no  wish  to  make 
light  of  the  evils  in  the  present  industrial  order  to  which  they 
respectively  refer.  Both  owe  the  strength  of  the  appeal  which 
they  make  to  fair-minded  men  to  the  fact  that  the  material 
aids  to  production,  land  and  capital  goods,  are  unequally 
distributed  and  that,  as  a  result,  every  community  presents 
the  contrast  between  the  bare-handed  labourer  of  ordinary 
intelligence  who,  by  his  best  endeavours,  can  earn  only  a  scant 
livelihood  and  provide  but  indifferent  educational  advantages 
for  his  children,  and  the  idle  man  of  property,  who  has  every- 
thing, although  he  does  nothing.  This  unequal  distribution 
of  property  may  be  necessary,  but  no  amount  of  reasoning  can 
make  it  seem  other  than  unfair  to  the  portionless  children  of 
the  poor.  Before  taking  up  in  the  last  chapter  the  question 
as  to  how  far  an  une([ual  distribution  of  wealth  is  a  necessary 
condition  to  progress,  we  must  next  consider  the  subject  of 
public  finance,  a  domain  in  which  many  reformers  besides 
Henry  George  have  sought  a  remedy  for  present  inequalities, 

REFERENCES  FOR  COLLATERAL   READING 

Gilman,  Profit-sharing  between  Employer  and  Employee,  *ScJiloss, 
Methods  of  Industrial  Remuneration;  Report  of  Proceedings  of 
Industrial  Remuneration  Conference,  London,  1885;  *  Jones,  Co-oper- 
ative Production  in  Great  Britain.  2  vols.;  Holy  oak  t\  History  of  Co- 


532  Plans  of  Economic  Reform 

operation,  2  vols. ,  and  The  Co-operative  Movement  of  to-day;  *  Lloyd, 
Labour  Copartnership;  Annals  of  the  English  Co-operative  Whole- 
sale Society;  Proceedings  of  the  Congresses  of  the  International 
Co-operative  Alliance  (especially  of  Fifth  Congress,  Manchester, 
iqo2);  ^George,  Progress  and  Poverty;  Dawson,  The  Unearned 
Increment;  Wallace,  Land  Nationalisation;  *Shcarnian,  Natural 
Taxation;  *Rae,  Contemporary  Socialism  (includes  chapter  on 
"  Single  Tax  ");  ^Kirktip,  History  of  Socialism;  Menger,  The  Right 
of  Labour  to  the  Whole  Product;  *  Fabian  Essays  in  Socialism; 
*Schdffle,^\\^  Quintessence  of  Socialism;  il/ar;ir,  Capital,  3  vols.-, 
*Bdhm-Bawerk,  Karl  Marx  and  the  Close  of  his  System;  *  Bellamy 
Looking  Backward,  and  Equality. 


CHAPTER  XXVII 

GOVERNMENT   EXPENDITURES    AND    GOVERNMENT 

REVENUES 

§  292.  With  the  exception  of  money   and  banking:    there  Importance 

is  no  topic  in  economics  to  which  more  attention  and  Htera-  ?/•  P"^^^^*^ 
,  ,  ,  ,     ,  ,  .  Finance 

ture  have  been  devoted  than  to  that  of  government  or  pubhc 

finance.    In  this  treatise  it  is  possible  to  discuss  only  the  more 

important  aspects  of  the  subject,  and  government  expenditures 

and  government  revenues  from  other  sources  than  taxation 

are  considered  only  so  far  as  is  necessary  to  introduce  the 

questions  of  Taxation  and  Tax  Reform  in  the  United  States 

■dealt  with  in  the  next  chapter. 

Perhaps  the  best  way  to   determine   what  are  the  actual  Government 
functions  of  government  is  to  examine  a  statement  of  public  tures^n' 
■expenditures  for  a  typical  year.     The  table  on  the  next  page,  United 
drawn  from  the  eleventh  census  of  the  United  States,  sum- 
marises the  expenditures  of  all  of  the  different  branches  of  the 
government  for  the  year  1890. 

The  largest  single  item  of  expenditure  is  for  public  edu-  For 
cation.  Although  among  the  latest  to  be  assumed  education  "^^  ^^^ 
is  now  recognised  as  one  of  the  most  important  functions  of 
the  democratic  state.  The  economic  justification  for  main- 
taining free  schools,  free  colleges,  and  even  free  universities  at 
public  expense,  has  already  been  suggested.*  Quite  as  con- 
clusive is  the  political  justification.  Successful  self-govern- 
ment is  only  possible  for  communities  in  which  there  is  a  high 
level  of  general  intelligence.  Tiiis  high  level  is  most  easily, 
surely,  and  cheaply  attained  and  perpetuated  by  means  of  free 
public  education. 

Next  to  expenditures  for  education  from  the  point  of  view  For 
both  of  costliness  and  importance  are  those  connected  with  ^^^f^^^e 
national  defence.    In  the  United  States  the  actual  outlay  upon 
*  C/",  Chapter  Xtll.,  Section  139 
533 


534     Government  Expenditures  and  Revenues 


EXPENDITURES   OF   NATIONAL,    STATE,    AND    LOCAL 
GOVERNMENTS   IN   THE   UNITED   STATES   IN    1890. 


r.  Educational  purposes 

2.  Military  pensions       .... 

3.  Military  purposes      .... 

4.  Interest  on  public  debt     . 

5.  Police  departments 

6.  Health  departments 

7.  Fire  departments      .... 

8.  The  judiciary 

9.  Penal  and  reformatory  institutions 

10.  Charities  

It.  Indians 

12.  Improving  rivers  and  harbours 

13.  Roads,  bridges,  sewers,  and  ditches 

14.  Postal  service 

15.  Lighting 

16.  Public  buildings  and  their  maintenance 

17.  Public  parks  and  places  . 

18.  Executive  departments    . 

19.  Congress  and  legislative  departments 

20.  Foreign  intercourse 

21.  Salaries,  fees,  and  commissions 

22.  Miscellaneous  expenditures     . 

Total 


$145,600,000 

106,900,000 

57,500,000 

82,700,000 

23,900,000 

3,300,000 
16,400,000 
23,000,000 
12,400,000 
40,000,000 

6,700,000 
11,700,000 
72,300,000 
66,300,000 
11,400,000 
56,800,000 

3,000,000 
16,800,000 
10,500,000 

1,600,000 

37,600,000 

109,500,000 

915,900,000 


For 
Protection 


For 

Charitable 
Relief 


army  and  navy  in  time  of  peace  is  relatively  small.  When  to 
this  is  added  however  the  enormous  pension  bill,  which  an 
over-generous  Congress  has  created  for  the  benefit  of  those 
who  have  participated  in  the  nation's  wars,  and  the  interest 
on  the  public  debt,  most  of  which  was  incurred  in  connection 
with  these  same  wars,  expenditures  for  national  defence  are 
seen  to  be  even  greater  than  expenditures  for  education. 

Third  in  the  list  are  outlays  connected  with  the  protection 
of  life,  health,  and  property  within  the  country  and  tlie  ad- 
ministration of  justice.  In  this  group  belong,  of  course,  the 
expenditures  on  penal  and  reformatory  institutions,  which  pro- 
tect society  by  isolating  for  a  time  those  who  have  shown  an 
anti-social  disposition. 

The  charitable  relief  of  the  defective  and  dependent  and 
special  provision  for  the  Indians  present  a  fourth  governmen- 
tal function. 


Expenditures  in  the  United  States      535 

The   fifth    group   of   cxpcn<hturcs    is    concerned    vvltii    the   For 

nation's  material  interests.     Different  branches  of  the  cfovern-  J""J"stnal 

"  Purposes 

ment  spend  vast  sums  on  the  improvement  of  rivers  and  har- 
bours, on  roads,  bridges,  sewers,  and  ditches,  on  the  postal  serv- 
ice, for  lighting  the  public  streets,  for  the  erection  and  main- 
tenance of  public  buildings,  and  for  public  parks  and  other 
places  of  public  amusement. 

A  sixth  group  of  expenditures  relates  to  the  ordinary  de-  For 
partments  of  government  whose  existence  is  necessary  to  the  J^g^ts  of 
continued  operation  of  all  of  the  different  functions  that  have  Government 
been  enumerated.    In  addition  to  the  executive  and  legislative 
branches  there  are  the  representatives  of  the  country  abroad 
and  various  bureaus  and  commissions,  some  educational,  some 
administrative,  and  some  judicial  in  character,  that  are  main- 
tained. 

Finally,  there  are  miscellaneous  expenditures  important  in  For 
the  aggregate,  since  they  constitute  more  than  one-ninth  of  jaifeou's 
the  total,  but  not  readily  differentiated  in  a  simple  scheme  of  Purposes 
classification. 

§  20^.  Diverse  as  are  these  expenditures  and  the  functions  Government 
•  .  .  ,  ,  •   ,        1  1  1  1  Expendi- 

m    connection   with    which    they    are    made,    they    have    one  tures  De- 
common  characteristic.     All  are  undertaken  for  the  purpose  p^"j^ot:^% 
of  promoting  the  general  welfare.     From  the  point  of  view  General 
of  political  theory  the  relation  between  public  and  private  ac-  ^^  elfare 
tivities  in  self-governing  communities  is  exceedingly  simple. 
Through  his  private  activities  each  individual  secures,  so  far 
as  his  means  will  permit,  those  commodities  and  services  which 
he  requires  to  satisfy  his  wants  and  the  wants  of  those  depend- 
ent upon  him.     But  certain  wants  are  collective  in  their  na- 
ture, and  certain  services  can  only  be  rendered  satisfactorily 
by  a  central  authority  acting  as  the  agent  or  servant  of  the 
whole  community.     The  satisfaction  of  these  wants  and  the 
rendering  of  these  services  are  the  tasks  of  the  government. 
Every  one  needs  to  be  protected.    For  this  purpose  armies  and 
navies  are  maintained,  police  and  fire  departments  are  organ- 
ised, courts  of  justice  are  provided,  and  penal  and  reforma- 
tory institutions  are  supported.     The  well-being  of  every  one 
requires  that  educational  institutions  of  high  standard  shall  be 
freely  open,  if  not  to  themselves  and  their  own  children,  at  least 


Welfare 
the  only 
Crilerion 


Public  vs. 
Private 
Expendi- 
tures 


536     Government  Expenditures  and  Revenues 

to  their  neighbours  and  their  neighbours'  children,  so  that  an 
educated  pubHc  opinion  may  be  created  as  a  guarantee  that 
just  laws  will  be  passed  and  efficiently  enforced.  The  concern 
of  every  one  in  the  other  expenditures  described  is  nearly,  if 
not  quite,  as  clear  as  that  in  protection  and  education.  They  all 
have  to  do  with  general  and  public  interests  and  are  justified 
only  to  the  extent  that  through  them  these  interests  are  ad- 
vanced. 

Some  writers  have  sought  to  formulate  definite  rules  by 
means  of  which  it  can  be  judged  in  advance  whether  a  given 
activity  should  or  should  not  be  undertaken  by  the  govern- 
ment. Such  rides  are  helpful  when  based  upon  actual  experi- 
ence but  when  based,  as  is  usually  the  case,  upon  some  dogma 
as  to  the  proper  sphere  of  the  state,  as  that  its  sole  duties  are  to 
protect  life  and  property  and  administer  justice,  they  are  al- 
most certain  to  be  misleading.  Developing  states  find  it  ad- 
vantageous to  assume  very  different  functions  at  different 
periods.  On  the  whole  as  political  organisation  becomes  more 
efficient,  there  appears  to  be  a  tendency  for  the  functions  of 
the  state  to  broaden.  Whether  this  is  desirable  or  not  can 
only  be  determined  by  experience  of  its  effects.  If  in  this 
way  the  well-being  of  the  whole  community  is  increased,  the 
change  is  justified.  There  is  nc  other  universally  valid  cri- 
terion by  which  the  rightness  of  either  public  or  private  action 
can  be  determined. 

§  294.  The  dividing  line  between  public  and  private  ex- 
penditures corresponds  with  the  division  between  public  and 
private  activities.  Each  community  has  a  limited  supply  of 
commodities  and  of  workmen  capable  of  rendering  services. 
The  government  should  withdraw  from  private  industries  so 
many  and  only  so  many  workmen  as  can  produce  as  public 
servants  services  and  commodities  of  greater  value  than  those 
turned  over  to  such  servants  as  their  compensation.  Through 
public  expenditures  a  part  of  the  wealth  that  would  otherwise 
be  available  for  private  use  is  capitalised  in  public  works  or  paid 
out  in  wages  or  salaries  to  public  servants.  Unless  the  re- 
sulting commodities  and  services  are  worth  more  to  the  com- 
munity than  what  has  been  given  for  them  the  public  expen- 
ditures are  unwarranted. 


Division  of  Governmental  Functions    537 

Simple  as  the  matter  is  when  stated  in  general  terms,  it 
presents  serious  practical  difficulties.  There  is  no  way  of 
measuring  the  value  to  a  country  of  a  standing  army  or  of  the 
"  biggest  navy  afloat."  Comparisons  of  the  services  of  such 
public  institutions  with  their  cost  when  made  by  the  "  expan- 
sionist "  and  the  "  anti-imperialist  "  lead  to  very  divergent  con- 
clusions. Equally  difficult  is  the  measuring  of  the  value  of  the 
other  services  of  government.  That  free  public  schools  are 
worth  even  more  than  they  cost  will  be  generally  admitted,  but 
how  shall  it  be  determined  how  much  of  the  people's  money 
shall  be  expended  on  the  maintenance  of  free  public  universi- 
ties? The  line  must  be  drawn  somewhere,  but  the  difficulty 
of  deciding  where  is  illustrated  every  time  an  appropriation 
bill  affecting  a  state-supported  university  comes  up  for  con- 
sideration before  one  of  the  state  legislatures.  These  practical 
difficulties  differ,  however,  only  in  degree  from  the  difficulties 
that  arise  in  connection  with  all  expenditure.  Parents  are 
often  as  much  puzzled  to  determine  whether  a  college  educa- 
tion will  be  a  "  paying  investment  "  for  their  sons,  as  are  state 
legislatures  to  decide  whether  it  will  ''  pay  "  to  invest  more  of 
the  people's  money  in  the  institutions  that  offer  college  educa- 
tions. In  the  former  case  individuals,  in  the  latter  the  people's 
representatives  must  consider  the  alternative  uses  to  which 
the  same  sums  of  money  might  be  put.  Unices  it  is  clear  that 
the  thing  secured  is  worth,  when  broadly  considered,  more 
than  it  costs,  the  expenditure  is  unwarranted. 

§  295.  In  a  federal  state  like  the  United  States  different  g^^'.^^j^"  °* 
functions  are  performed  by  different  branches  of  the  govern-  mental 
ment.     National  defence,  the  improvement  of  rivers  and  bar-  Unu'eT"^  *° 
hours,  the  promotion  of   foreign  trade  and   intercourse,   and  States 
to  some  extent  the  administration  of  justice  are  functions  un- 
dertaken by  the  national  government.     To  the  states  are  al- 
lotted tasks  connected  with  the  development  and  administra- 
tion of  business  law.  or  justice,  the  maintenance  of  penal  insti- 
tutions, the  care  of  many  of  the  defectives  and  dependents  who 
are  incapable  of  self-support,  the  development  and  maintenance 
of  higher  educational  institutions,  and  the  furthering  of  certain 
of  the  material  interests  of  the  community  ranging  all  the  way 
from  the  construction  and  operation  of  canals  to  the  extermina- 


538      Government  Expenditures  and  Revenues 

tion  of  insects  harmful  to  vegetation.     The  functions  dele- 
gated by  the  state  legislatures  to  local  governing  bodies,  coun- 
ties, cities,  boroughs,  towns,  school  districts,  etc.,  are  similar 
to  those  assumed  by  the  states  themselves  but  more  local  in 
character.      Among   these   the   maintenance   of   the   common 
schools,  and  of  streets,  bridges,  sewers  and  ditches,  the  sup- 
plying of  water,  and  the  protection  of  life,  health,  and  prop- 
erty are  among  the  most  important  undertaken  by  govern- 
ment. 
Correspond-       An  approximate  idea  of  the  division  of  governmental  func- 
of^xpendi^  tions  is  afforded  by  statistics  of  the  expenditures  of  the  differ- 
tures  ent  branches  of  government.    In  the  census  year  1890  the  total 

expenditures  of  the  national  government  were  $630,000,000, 
which  was  approximately  $10  per  capita.  In  the  same  year  the 
state  of  New  York  expended  $13,170,000,  or  $2.20  per  capita 
of  its  population, =^  and  the  city  of  New  York  $34,985,000,  or 
approximately  ^2^  per  capita  of  the  city's  population.  In  the 
next  census  year,  1900,  the  expenditures  of  each  of  the  de- 
partments of  the  government  were  larger  in  proportion  to  the 
population.  The  national  government  spent  $886,000,000,  or 
$11.66  per  capita;  the  state  of  New  York  $23,934,433,  or  $3.30 
per  capita ;  and  the  city  of  New  York  $94,417,964,  or  $27.80  per 
capita.  There  was  thus  an  increase  in  per  capita  expenditures 
in  all  three  departments  of  the  government  but  not  one  to 
alter  seriously  the  relation  between  them.  From  the  point  of 
view  of  expenditure  we  may  conclude  that  the  local  govern- 
ing bodies,  or  at  any  rate  the  cities,  are  more  than  twice  as 
important  as  the  national  government,  while  the  national  gov- 
ernment itself  is  three  or  four  times  as  important  as  the  states. 
Relative  §  296.  The  above  figures  are  significant  also  for  the  light 

of^Publt"'^^  they  throw  upon  the  relative  importance  of  governmental  and 
and  Private  private  expenditures  in  the  United  States.  IMaking  allowance 
tures"[n"  ^^^  ^^^  ^^^^  ^^^^^  the  expenditures  of  New  York  State  and 
United  City  are  larger  in  proportion  to  their  populations  than  those  of 

the  other  state  and  local  governing  bodies  we  may  assume  that 

*  The  expenditures  of  the  forty-five  states  then  in  existence  amounted 
in  the  same  year  to  $105,904,997,  which  was  $1.70  per  capita  of  their 
population.  Cf.  New  York  State  Library  Bulletin,  No.  8  (March,  1897), 
on  State  Finance  Statistics, 


Sources  of  Public  Revenues  539 

the  annual  expenditures  of  all  branches  of  the  government 
amount  to  from  $30  to  $35  for  every  man,  woman,  and  child  in 
the  United  States,  or  to  from  $150  to  $175  for  the  average 
family  of  five  persons.  We  have  no  certain  way  of  measuring 
the  average  family  income  in  the  United  States  exclusive  of 
what  is  paid  to  the  government  in  the  form  of  taxation  but  it  is 
a  liberal  allowance  to  assume  that  it  lies  somewhere  between 
$700  and  $900  a  year.  If  we  take  the  upper  figure  for  govern- 
mental expenditures  and  the  lower  figure  for  family  income  it 
appears  that  as  much  as  one-fifth  of  the  total  national  income 
is  expended  each  year  by  the  different  branches  of  the  govern- 
ment, leaving  only  the  other  four-fifths  to  be  spent  or  accumu- 
lated by  individuals.  Combining  the  other  extremes  the  gov- 
ernmental expenditures  are  found  to  be  one-seventh  of  the  total, 
leaving  the  other  six-sevenths  for  individual  disbursement. 
Somewhere  between  these  limits  of  one-fifth  and  one-seventh 
of  the  total  national  income  governmental  expenditures  very 
probably  lie.  When  the  full  significance  of  this  fact  is  realised, 
the  importance  of  honest,  efficient,  and  intelligent  government 
begins  to  be  appreciated. 

§  297.  The  revenues  expended  for  public  purposes  are  de-  |°"^^^^  ^^ 
rived  from  a  variety  of  sources.     Writers  on  finance  have  de-  Revenues 
voted  much  thought  to  their  classification  but  for  our  purpose 
it  will  suf^ce  to  distinguish  the  following:  ( i)  public  lands  and 
industries;  (2)  special  assessments;  (3)  taxes;  (4)  loans;  (5) 
miscellaneous  sources. 

The  income  from  public  lands  and  industries  depends  obvi-  ^^^'^°J^^?.,. 

^  111-      From  Public 

ously  upon  the  governmental  policy  in  reference  to  the  public  Lands 

domain  and  in  reference  to  embarking  upon  industrial  enter- 
prises. In  the  United  States,  notwithstanding  the  vast  ex- 
tent of  the  public  lands,  comparatively  little  net  revenue  has 
been  derived  from  these  sources.  The  public  land  policy  has 
been  controlled  from  an  early  period  by  the  thought  that  it  is 
better  to  sell  the  lands,  even  for  merely  nominal  sums,  to  per- 
sons who  will  really  settle  upon  them  and  bring  them  under 
cultivation  than  to  treat  them  as  an  important  source  of 
revenue.  In  consequence  of  this  policy  the  federal  government 
now  receives  an  annual  average  of  onlv  two  or  three  million 
dollars  from  this  source,  while  it  expends  considerably  more 


540     Government  Expenditures  and  Revenues 

than  this  upon  the  bureaus,  whose  function  it  is  to  study  and  re- 
port upon  the  land  and  natural  resources  of  the  country.  The 
income  of  the  states  from  the  public  lands  has  been  somewhat 
larger  proportionally,  but  only  for  Texas,*  which  entered  the 
Union  with  a  vast  public  domain,  has  it  ranked  as  a  chief 
source  of  revenue. 
From  The  only  important  public  industries  carried  on  in  the  United 

Industries  States  are  the  post  office  and  municipal  water  systems  and  both 
of  these  are  conducted  on  the  principle  of  charging  no  more 
than  the  service  actually  costs.  In  the  case  of  the  post  office 
this  has  usually  resulted  in  a  deficit  which  must  be  made  good 
out  of  the  other  sources  of  revenue. 
From  The  second  and  third  items,  special  assessments  and  taxes,, 

Assessments  ^^^  usually  treated  together  and  are  the  principal  sources  of 
and  Taxes  revenue  of  all  modern  governments.  As  the  remaining  sec- 
tions of  this  and  the  following  chapter  treat  of  taxes  nothing 
further  need  be  said  about  them  at  this  point.  A  special  as- 
sessment has  been  defined  as  "  a  payment  made  once  for  all  to 
defray  the  cost  of  a  specific  improvement  to  property  under- 
taken in  the  public  interest,  and  levied  by  the  government  in 
proportion  to  the  particular  benefit  accruing  to  the  property- 
owner."f  Such  assessments  are  resorted  to  very  commonly  by 
American  municipalities  in  connection  with  public  improve- 
ments like  the  laying  out  of  streets,  the  paving  of  streets,  the 
laying  of  sidewalks,  etc.,  which  normally  add  to  the  value  of 
adjoining  property.  In  such  cases  it  seems  entirely  appropri- 
ate that  the  persons  receiving  a  special  and  peculiar  benefit 
from  the  improvement,  should  contribute  in  a  special  and  pecu- 
liar way  towards  the  expenditure  which  it  involves.  Unfor- 
tunately the  instances  are  comparatively  rare  where  the  special 
benefit  enjoyed  as  a  result  of  government  outlay  can  be  dis- 
tinguished from  the  general  benefit,  and  for  this  reason  the 
field  for  the  application  of  the  special-assessment  principle  is 
rather  limited. 

*  This  state  derived  from  its  public  lands  $1,317. 453  iti  1890  and 
$864,921  in  1895.  Its  present  land  policy  is  illustrated  by  the  fact  that 
on  September  i,  1905,  it  offered  for  sale  6,000,000  acres  at  a  minimum 
price  of  $1  an  acre  to  bona  fide  settlers.  • 

+  Se'ligman,  Essays  in  Taxation,  p.  304. 


Revenue  from  Loans  541 

§  298.  Loans  constitute  an  extraordinary  rather  than  an  From  Loans 
orcHnary  source  of  revenue.  For  governments  as  for  indi- 
viduals, borrowing  in  order  to  meet  current  expenditures  simply 
puts  off  the  time  when  the  needed  revenue  must  be  obtained 
•from  some  other  source  Since  to  such  postponement  is  added 
the  disadvantage  that  interest  must  be  paid  for  the  sums  bor- 
rowed, a  resort  to  loans  is  only  justified  under  special  circum- 
stances. 

Writers  on  finance  agree  in  distinguishing  three  different  War  Leans 
cases  in  which  government  loans  may  properly  be  made.  The 
first  and  most  important  is  when  a  government  is  confronted 
by  a  war  or  some  other  serious  emergency  which  demands  im- 
mediate and  large  outlays.  In  this  case  the  well-being  not  only 
of  the  present  but  of  future  generations  is  at  stake  and  a  part 
of  the  sacrifice  which  must  be  made  may  well  be  imposed  upon 
those  who  are  to  contribute  to  the  government's  revenues  in 
future  years.  Moreover  the  money  needed  must  be  secured  im- 
mediately and  there  is  no  device  through  which  returns  may 
be  obtained  at  once  comparable  with  that  of  borrowing.  For 
these  reasons  part  of  the  revenue  required  may  be  derived  from 
the  sale  of  government  bonds,  or  promises  to  repay  at  some 
future  date  wath  interest  the  sums  received  in  the  present.  In 
inaugurating  a  borrowing  policy  the  government  must  be  care- 
ful, however,  to  inaugurate  at  the  same  time  changes  in  other 
parts  of  the  revenue  system  which  will  insure  the  means  of 
paying  interest  and  principal  in  full  as  they  fall  due.  Almost 
if  not  quite  as  important  as  immediate  command  over  money 
for  a  government  embarked  upon  a  war  is  unimpaired  credit 
or  future  borrowing  power.  Unless  the  government's  credit  is 
protected  it  may  find  itself  heli)less  at  the  very  time  when  a 
second  loan  is  needed  to  carry  the  war  to  a  successful  issue. 
The  device  which  is  now  very  generally  employed  to  reassure 
lenders  who  entrust  their  savings  to  the  government  is  that  of 
a  sinking  fund.  Revenues  constituting  a  certain  proportion  of 
the  outstanding  obligations  are  dedicated  each  year  to  the 
debt  service,  and  in  this  way  a  sufficient  sum  is  secured  to  pay 
the  principal  of  the  debt  when  it  becomes  due.  Contributions 
to  the  sinking  fund  can  only  be  made,  of  course,  if  the  ordinary 


Industrial 
Loans 


Deficiency 
Loans 


Restrictions 
on  Borrow- 
ing Power 
in  United 
States 


542      Government  Expenditures  and  Revenues 

revenues  are  increased  and  this  is  usually  brought  about 
through  extraordinary  or  war  taxes. 

The  second  case  when  government  borrowing  is  warranted 
is  when  the  money  is  needed  for  the  development  of  some  pro- 
ductive public  industry.  If  a  city  proposes  to  install  its  own 
water  works,  for  example,  it  may  very  properly  borrow  money 
for  the  purpose  and  adjust  the  water  rates  so  that  they  will 
provide  enough  to  pay  the  interest  on  the  debt  and  to  accumu- 
late a  sinking  fund  out  of  which  the  principal  may  be  repaid 
when  it  falls  due.  This  is  the  more  defensible  because  the  bene- 
fits of  the  expenditure  are  shared  by  all  who  make  use  of  the 
city's  water  so  long  as  the  system  continues  to  be  used. 

The  final  case  in  which  a  resort  to  a  loan  may  be  defended 
is  to  make  up  for  a  small  deficiency  in  the  year's  revenues. 
Careful  financiering  requires  that  the  government's  income 
should  balance  as  nearly  as  possible  its  expenditures.  But  the 
income  is  somewhat  irregular  and  unless  the  public  treasury 
is  to  keep  on  hand  a  considerable  surplus  for  which  it  expects 
to  have  no  use,  which  is  undesirable,  it  must  often  occur  that 
the  legitimate  expenditures  run  ahead  of  the  revenues.  Under 
these  circumstances  a  government  is  clearly  justified  in  securing 
a  temporary  loan  to  be  repaid  the  following  year,  out  of  the 
larger  revenues  resulting  from  a  contemporaneous  change  in 
the  law  controlling  other  sources  of  income. 

§  299.  In  the  United  States  as  in  all  modern  countries  the 
above  principles  in  reference  to  public  loans  have  frequently 
been  disregarded.  It  is  so  easy  to  obtain  money  by  borrow- 
ing and  so  difficult  often  to  obtain  it  in  any  other  way  that 
public  authorities  are  under  a  constant  temptation  to  issue  and 
sell  bonds  when  they  ought  rather  to  increase  taxes  or  exercise 
more  economy  on  the  side  of  expenditures.  Experience  wnth 
the  evils  of  reckless  pledging  of  the  public  credit  has  led  in 
most  of  the  states  to  the  imposition  of  constitutional  restrictions 
on  the  borrowing  power.  No  such  restriction  has  been  imposed 
upon  Congress  and  on  the  whole  the  federal  debt — except  dur- 
ing the  critical  period  of  the  Civil  War — has  been  kept  within 
reasonable  limits.  The  restrictions  on  the  states  usually  take 
the  form  of  limiting  the  amount  that  may  be  borrowed  to  a 
certain  proportion  of  the  value  of  the  taxable  property  within 


Revenue  from  Gifts  543 

the  state.  The  Hmitations  on  municipahties,  also  contained  in 
many  of  the  state  constitutions,  arc  sometimes  even  more  rigid. 
Thus  the  constitution  of  New  York  State,  adopted  in  1894,  hm- 
its  the  indebtedness  which  any  city  within  the  state  may  incur 
to  ten  per  cent  of  the  assessed  vakiation  of  its  real  estate.  Ex- 
ception is  made  of  revenue  bonds  issued  in  anticipation  of  re- 
ceipts from  taxes  and  of  water  bontls  but  the  latter  must  be 
counted  as  a  part  of  the  debt  when  the  issue  of  bonds  for  any 
other  purpose  is  contemplated.  This  provision  lias  been  justly 
criticised  on  the  ground  that  it  makes  no  distinction  between 
loans  contracted  in  connection  with  public  industries,  the  in- 
come from  which  will  be  ample  to  repay  the  loans  without  im- 
posing any  additional  burden  upon  taxpayers,  and  loans  which 
must  ultimately  be  repaid  out  of  the  revenues  derived  from 
taxes.  For  the  former  class  of  loans  the  limitation  is  much 
too  rigid  and  in  the  case  cited  it  is  already  having  the  effect 
of  seriously  retarding  legitimate  and  much-needed  municipal 
improvements  in  the  cities  of  the  state. 

§  300.  The  sources  of  public  revenue  referred  to  as  mis-  Revenue 
cellaneous  include  such  diverse  items  as  gifts,  fines  and  other  q^^ 
penalties,  and  fees.  In  the  United  States  gifts  figure  among 
public  receipts  chiefly  in  the  form  of  donations  to  the  "  con- 
science fund  "  and  are  neither  large  nor  important.*  Few 
persons  seem  to  realise  that  in  giving  to  the  government  they 
are  contributing  to  the  one  agency  whose  primary  business  it 
is  to  advance  the  general  welfare.  Contrasted  with  the  lavish 
gifts  to  private  and  denominational  schools  and  universities 
which  are  constantly  being  made  by  America's  rich  men,  the 
gifts  to  the  public  schools  and  the  state-supported  universities 
are  so  infrequent  as  to  excite  general  comment  when  they 
occur.  The  attitude  of  mind  towards  the  government  which 
this  fact  reflects  is  partly  inherited  from  the  past,  when  all 
persons  not  in  the  privileged  governing  class  were  as  a  matter 
of  course  opposed  to  the  government,  and  partly  the  result 
of  a  wide-spread  distrust  of  the  officials  who  control  public 
expenditures.  It  is  to  be  hoped  that  as  time  goes  on  it 
may  give  place  to  a  juster  appreciation  of  the  importance 
of  the  services  which  the  government  renders.  Certainly 
*  Exception  must  be  made  of  Mr.  Carnegie's  libraries. 


From  Fines 
and  Fees 


Definition 
of  a  Tax 


544     Government  Expenditures  and  Revenues 

there  is  no  way  in  which  a  man  of  wealth  can  more  greatly 
benefit  the  city  in  which  he  lives  than  by  supplementing  public 
expenditures  for  better  school  facilities  and  more  ample  parks 
and  play-grounds,  or  in  general  at  those  points  where  the  pub- 
lic need  is  greatest  and  the  expenditures  least  adequate. 

Fines  and  other  penalties,  such  as  the  confiscation  of  property 
unlawfully  brought  into  the  country,  are  unimportant  sources 
of  revenue  and  require  no  special  comment.  By  a  fee  is  meant 
"  a  payment  to  defray  the  cost  of  each  recurring  service  un- 
dertaken by  the  government  primarily  in  the  public  interest, 
but  conferring  a  measurable  special  advantage  on  the  fee- 
payer."*  It  is  distinguished,  on  the  one  hand,  from  the  price 
paid  for  a  commodity  supplied  by  the  government,  such  as  a 
water  rate,  because  the  primary  motive  of  the  government  in 
rendering  the  service,  issuing  marriage  licenses  for  example, 
is  regulation  in  the  public  interest,  the  benefit  to  the  individual 
paying  the  fee  being  secondary.  On  the  other  hand,  it  is  dis- 
tinguished from  a  tax  in  that  it  is  a  payment  for  a  special 
benefit  enjoyed  by  the  payer,  whereas  taxes  are  a  return  for 
general  benefits.  As  a  rule  fees  are  made  only  high  enough 
to  cover  or  partly  cover  the  cost  of  the  service  rendered.  Ex- 
perience has  shown  that  they  ought  not  to  be  relied  upon  to 
compensate  the  official  who  collects  them  because  they  are  cer- 
tain to  yield  either  less  or  more  than  a  fair  compensation  for 
the  work  done  and  thus  to  demoralise  the  public  service  by 
rewarding  unequally  officials  of  the  same  grade. 

§  301.  A  tax  may  be  defined  as  a  compulsory  contribution 
to  the  government  to  defray  expenses  incurred  for  the  com- 
mon benefit  without  reference  to  special  advantages  enjoyed. 
The  points  to  be  emphasised  in  this  definition  are  that  the 
payment  is  compulsory,  that  the  proceeds  are  to  be  used  for 
the  common  benefit,  and  that  the  justification  for  the  payment 
is  participation  in  these  common  benefits  rather  than  any  special 
advantage  enjoyed.  The  last  statement  is  given  prominence 
because  it  throws  light  upon  the  first  question  that  arises  in 
connection  with  any  system  of  taxation,  that  is,  as  to  the 
principle  according  to  which  taxes  should  be  apportioned 
among  the  individuals  in  a  community.  A  little  thought  shows 
*  Seligman,  Essays  in  Taxation,  p.  304. 


The  Equal  Sacrifice  Theory  545 

that  the  correct  principle  of  apportionment  cannot  be  that  of 
special  benefit  received  from  government  expenrliturcs.  Those 
who  need  public  assistance  most,  abandoned  children,  paupers, 
the  insane,  etc.,  are  the  very  ones  who  are  least  able  to  pay 
taxes.  On  the  other  hand  those  who  are  able  to  pay  most  seem 
often  in  little  need  of  those  services  which  the  government  ren- 
ders. Men  of  means  may  employ  private  detectives,  watchmen, 
etc.,  to  look  after  their  persons  and  property,  they  do  not 
usually  send  their  children  to  the  public  schools,  and  in  other 
ways  they  make  little  use  of  those  things  which  the  govern- 
ment supplies  gratuitously.  Obviously  if  each  paid  taxes  only 
in  proportion  to  the  special  benefits  enjoyed,  the  whole  busi- 
ness of  government  might  be  brought  to  a  standstill. 

Opposed  to  the  principle  of  taxation  in  proportion  to  benefits  Taxes 
is  that  of  taxation  according  to  ability  to  pay,  or  the  "  faculty  "  on  "Each^in" 
theory.     This  rests  on  the  broad  ground  that  it  is  impossible  Proportion 
to  measure  the  benefits  which  individuals  owe  to  the  govern-  ' '  ^ 

ment,  because  without  government  civilised  society  could  not 
exist.  From  the  time  a  person  comes  into  the  world,  » 
whether  he  be  rich  or  poor,  his  development  and  success  at 
•every  stage  is  conditional  upon  the  presence  of  the  machinery 
for  preserving  order,  protecting  life  and  property,  and  adminis- 
tering justice.  All  that  can  be  said  of  these  benefits  is  that 
their  importance  for  every  one  is  inestimable,  and  that  the  only 
test  of  what  should  be  given  in  return  for  them  is  the  ability  of 
the  giver.  The  true  relation  between  the  government  and  the 
tax-payer  is  thus  like  that  between  the  member  and  his  church. 
Each  should  contribute  according  to  his  means  and  recognise 
that  the  return  in  the  services  rendered  by  the  government 
much  more  than  compensates,  for  any  contribution,  no  matter 
how  large. 

To  give  greater  precision  to  the  principle  of  ability  or  faculty  The  Equal 
It  has  been  suggested  that  the  test  to  be  applied  is  that  of  Theory 
^'  equal  sacrifice,"  that  is.  that  the  contributions  to  the  state 
should  impose  equal  sacrifices  upon  all  of  those  who  contribute. 
This  test  would  be  quite  valid  if  it  could  be  accurately  applied, 
but  in  practice  in  the  apportionment  of  taxes  it  is  possible  to 
attain  only  approximate  justice,  and  for  this  purpose  the  ability 
or  faculty  test  is  sufficiently  exact. 


Principal 
Taxes  Im 
posed  in 
United 
States 


546     Government  Expenditures  and  Revenues 

§  302.  The  principal  taxes  imposed  in  the  United  States 
may  be  classified  as  follows :  Taxes  on  income,  including  in- 
heritance taxes ;  taxes  on  property ;  and  taxes  on  business,  in- 
cluding excise  taxes  and  customs  duties.*  The  federal  govern- 
ment derives  more  than  nine-tenths  of  its  net  revenue  from  in- 
ternal revenue  or  excise  taxes,  and  tariff  or  customs  duties. 
These  are  described  as  taxes  on  business  because  they  apply  to 
commodities  usually  before  they  have  come  into  the  possession 
of  consumers  and  consequently  affect  business  relations.  The 
revenues  of  the  states  come  for  the  most  part  from  the  general 
property  tax  and  from  corporation,  license,  and  inheritance 
taxes.  The  last  are  characterised  as  taxes  on  income  because 
from  one  point  of  view  inheritances  are  income  and  may  be 
so  described  for  purposes  of  taxation.  Finally,  the  local 
governing  bodies  depend  for  their  revenues  mainly  upon  the 
general  property  tax,  which  may  be  supplemented  by  local 
license  taxes. 

Among  the  influences  which  have  given  its  present  form 

io  the  system  of  taxation  in  operation  in  the  United  States  are 

Constitution  certain   provisions   inserted   in   the   federal   constitution  when 

the  country  was  still  in  its  infancy  and  altered  only  by  judicial 

interpretation  since.    Of  these  the  most  important  are: 

( 1 )  The  requirement  that  "  all  duties,  imposts,  and  excises 
shall  be  uniform  throughout  the  United  States." 

(2)  The  provision  that  "  no  capitation  or  other  direct  tax 
shall  be  laid  [by  Congress]  unless  in  proportion  to  the  census  " 
of  population. 

(3)  The  provision  that  "  no  tax  or  duty  shall  be  laid  [by 
Congress]   on  articles  exported  from  any  state." 

(4)  The  provision  that  "  no  state  shall,  without  the  consent 
of  the  Congress,  lay  any  impost  or  duties  on  imports  or  ex- 
ports, except  what  may  be  absolutely  necessary  for  executing 
its  inspection  laws." 

The  principal  effects  of  these  provisions  have  been  to  make 
the  courts  very  strict  in  their  insistence  on  the  rule  that  taxes 
must  be  "  uniform" ;  to  give  to  the  federal  government  ex- 
clusive use  of  import  duties  as  a  source  of  revenue ;  to  pre- 
vent any  hampering  of  the  country's  export  business  through 
*  Adams,  The  Science  0/  Finance,  pp.  335  e(  seq. 


Tax  Pro- 
visions of 
Federal 


The  Incidence  of  Taxes  547 

taxation;  and  to  nullify  the  income  tax  imposed  in  1894  and  of 
which  more  will  be  said  hereafter.  Although  in  the  last  in- 
stance the  government  was  seriously  embarrassed  by  the  con- 
stitutional restriction,  writers  on  finance  generally  approve 
these  provisions  as  having  behind  them  sound  reasons  of  public 
policy.  Certainly  the  freedom  of  exports  and  immunity  from 
state  interference  with  imports  guaranteed  by  the  constitution 
have  been  of  the  greatest  value  to  the  country's  foreign  trade. 

§  303.  To  form  an  opinion  whether  the  various  taxes  enu-  The  Shift- 
merated    above    obey    the    principle    "  taxation    according    to  incidence 
ability,"  it  is  necessary  to  consider  in  connection  with  each  the  oi  Ta.\es 
question:  by  whom  is  the  tax  paid  and  how  does  it  afifcct  the 
general  distribution  of  income  in  the  community,  upon  which 
ability  to  pay  depends.    The  first  of  these  questions  is  that  of 
"  shifting   and   incidence "   and   the   second   merely   a   special 
phase  of  the  general  problem  of  distribution. 

It  is  a  fact  familiar  to  every  one  that  taxes  are  often 
shifted  by  those  who  pay  them  to  others  so  that  ultimate  pay- 
ment may  be  made  by  persons  ignorant  of  the  taxes'  very 
existence.  This  shifting  is  often  very  complicated  and  our 
treatment  of  it  must  be  illustrative  rather  than  exhaustive. 

Customs  duties  and  excise  taxes  are  imposed  on  commodities  The  Inci- 
usually  in  the  hands  of  dealers.  After  they  have  been  in  force  customs 
for  a  reasonable  time  it  is  obvious  that  they  will  be  looked  upon  and  Excise 
as  additions  to  the  expenses  of  producing  and  selling  the  com- 
modities affected.  Like  other  items  in  the  expense  of  produc- 
tion they  will  have  to  be  covered  in  the  long  run  in  the  prices 
for  which  the  goods  are  sold,  or  in  other  words  they  will  nor- 
mally be  shifted  from  the  seller  to  the  buyer  and  ultimately  to 
the  consumer.  This  does  not  necessarily  mean  that  the  price 
after  the  tax  is  imposed  will  be  higher  than  the  earlier  price 
by  the  exact  amount  of  the  tax.  As  the  price  rises  purchases 
will  decrease  and  in  the  readjustment  of  the  supply  which  be- 
comes necessary  other  items  in  the  expense  of  production  may 
be  altered.  Or  the  commodity  may  be  the  product  of  a 
monopoly,  which  can  well  afford  to  bear  a  part  of  the  tax  itself 
and  which  is  already  charging  the  public  as  high  a  price  as  is 
prudent.  Thus  as  the  result  of  the  tax  the  price  may  remain 
unchanged  or  be  advanced  only  enough  to  cover  a  part  of  the 


Property 
and  Poll 
Taxes 


Evasion 
of  the 
General 
Property 
Tax 


548     Government  Expenditures  and  Revenues 

tax,  to  exactly  cover  the  tax,  or  by  an  amount  even  greater 
than  the  tax.  Confronted  by  these  different  possibiHties,  the 
economist  finds  it  difficult  to  lay  down  any  rule  as  to  the  justice 
of  customs  and  excise  taxes.  Where  they  are  shifted  in  part 
to  consumers  they  involve  acceptance  of  expenditure  for  the 
commodities  concerned  as  the  test  of  ability  to  pay  taxes.  It 
needs  no  extended  argument  to  prove  that  this  is  a  very  unfair 
test.  The  expenditures  of  the  poor  for  sugar,  woollen  goods, 
tobacco,  malt  and  spirituous  liqtiors,  and  many  of  the  other 
things  that  are  taxed  in  the  United  States  are  very  much 
larger  in  proportion  to  their  incomes  than  the  expenditures  of 
the  rich.  In  so  far  as  taxes  of  this  sort  are  shifted  to  con- 
sumers, they  impose  a  disproportionate  burden  upon  the  poorer 
classes. 

§  304.  The  general  property  tax  is  an  institution  peculiar  to 
the  United  States  to  be  explained  by  reference  to  the  condi- 
tions found  in  a  primitive  agricultural  commimity.  When  the 
American  states  began  imposing  taxes  they  accepted  two  prin- 
ciples for  their  guidance,  first,  that  every  head  of  the  family 
should  contribute  something  towards  the  support  of  the  govern- 
ment and,  second,  that  the  amount  of  a  man's  property  was  the 
fairest  index  of  his  ability  to  pay  taxes.  In  harmony  with 
these  views  they  imposed  poll  and  general  property  taxes. 
Because  of  their  inconvenience  and  of  the  small  returns  to  be 
derived  from  them  poll  taxes  have  now  been  given  up  by  most 
of  the  states,  but  the  general  property  tax  is  almost  universally 
retained. 

The  question  of  the  incidence  of  the  general  property  tax  is 
complicated  by  the  fact  that  in  practice  a  large  amount  of 
property  escapes  assessment.  The  law  usually  distinguishes 
between  real  estate  and  personal  property.  The  former,  which 
includes  with  the  land  all  buildings  that  may  have  been  erected 
upon  it,  is  easily  assessed  and  since  it  cannot  be  removed 
serves  itself  as  security  that  the  tax  will  be  paid.  Personal 
property  on  the  other  hand,  which  includes  not  only  such 
things  as  furniture,  vehicles,  wearing  apparel,  tools,  imple- 
ments, etc.,  but  also  such  things  as  money,  notes,  mortgages, 
stocks,  bonds,  etc.,  cannot  by  any  means  that  have  yet  been 
devised,  be  accurately  assessed  and  consequently  escapes  in 


The  Personal  Property  Tax  549 

IcLV^c  measure  its  share  of  taxation.  It  would  take  too  long 
to  describe  the  different  ways  in  which  the  owner  of  personal 
property,  such  as  shares  of  stock  or  bonds  in  a  foreign  cor- 
poration, may  evade  the  tax  assessor.  Deliberate  concealment 
of  the  securities  subject  to  the  tax  is  usually  easy.  To  make 
this  more  certain  the  securities  may  be  issued  in  the  name  of 
some  other  person.  Fictitious  debts  may  be  created  and  de- 
clared to  offset  fully  the  securities  owned.  In  these  and 
many  other  ways  all  who  wish  to  escape  taxation  on  their 
personal  property  may  do  so  with  little  risk  of  detection. 

5   -^OS.  The   results  that   follow   from  this   easy   evasion  of  Evidence 

•    '  tliat  Per- 

the  personal  property  tax  have  become  notorious.     In  those  sonal 

very  states  where  it  is  well  known  that  personal  property  is  Property 
increasing  most  rapidly  the  amount  that  is  taxed  actually  Taxation 
diminishes.  Thus  in  California  between  1872  and  1887  while 
the  assessed  value  of  real  estate  increased  from  417  to  791 
million  dollars,  the  assessed  value  of  personal  property  de- 
creased from  220  to  164  millions.  By  1893.  although  the 
value  of  real  estate  had  continued  to  increase  until  it  was 
over  1,000  million  dollars,  the  value  of  personalty  had  in- 
creased to  only  173  millions.  In  New  York  the  assessed  value 
of  real  estate  has  increased  steadily  and  continuously  since 
tt  first  passed  the  $1,000,000,000  mark  in  1853.  In  that  year 
the  assessed  value  of  personal  property  was  $250,000,000,  so 
that  it  bore  one-fifth  of  the  tax.  By  1875  the  value  of  real 
estate  exceeded  $2,000,000,000  but  the  value  of  personalty 
had  increased  to  only  $358,000,000,  so  that  it  bore  about  one- 
seventh  of  the  tax  burden  in  that  year.  The  $3,000,000,000 
mark  for  the  value  of  real  estate  was  passed  in  1886.  but  in 
that  year  the  value  of  personalty  was  only  $336,000,000  or 
actually  less  than  it  had  been  eleven  years  before.  It  thus 
bore  only  a  little  more  than  one-tenth  of  the  tax.  The  tend- 
ency for  the  assessed  value  of  real  estate  to  advance  and  for 
that  of  personalty  to  lag  behind  has  continued  since  until  at 
present  in  the  richest  state  in  the  Union,  whose  wealth  consists 
very  largely  of  corporate  securities,  personal  property  repre- 
sents less  than  ten  per  cent  and  real  estate  more  than  ninety 
per  cent  of  the  property  assessed  for  the  general  property  tax. 
So  conspicuously  does  the  personal  property  tax  fail  to  reach 


Incidence  of 
a  Perfect 
General 
Property- 
Tax 


Analysis  of 
the  General 
Property 
Tax 


Tax  on 
Land  Paid 
by  Land- 
owner 


550     Government  Expenditures  and  Revenues 

the  property  of  those  who  are  unwilHng  to  pay  that  it  has 
been  justly  described  as  "  debauching  to  the  conscience  and 
subversive  of  the  pubhc  morals — a  school  for  perjury,  pro- 
moted by  law."  It  falls  only  on  those  who  are  too  scrupulous 
to  evade  it,  and,  as  its  unfairness  becomes  more  widely  recog- 
nised, the  number  who  are  willing  to  carry  burdens  which 
their  neighbours  callously  throw  off  becomes  smaller  and 
smaller. 

§  306.  In  those  communities,  if  any  such  remain,  in 
which  personal,  as  well  as  real,  property  is  assessed  at  its  full 
value,  the  general  property  tax  falls  ttpon  all  in  proportion  to 
their  means  and  thus  satisfies  fairly  well  the  canon  that  taxa- 
tion should  be  in  proportion  to  ability.  It  does  not  do  so  com- 
pletely because  obviously  it  fails  to  reach  the  income  derived 
from  personal  exertion.  Salaries,  profits,  professional  earn- 
ings all  escape  and  in  some  cases  those  who  receive  their  in- 
comes in  these  forms  have  no  property  to  speak  of  and  con- 
sequently contribute  nothing  to  the  government.  Thus  the 
general  property  tax  even  when  perfectly  administered  would 
need  to  be  supplemented  with  a  tax  upon  incomes  from  per- 
sonal exertion  to  satisfy  completely  the  requirements  of  jus- 
tice. 

But,  as  has  just  been  shown,  in  practice,  especially  in  the 
more  highly  developed  sections  of  the  country,  personal 
property  very  largely  escapes  the  tax.  The  general  property 
tax  becomes  in  consequence  a  tax  on  real  estate,  upon  certain 
kinds  of  personal  property,  and  upon  the  conscientious  owners 
of  all  kinds  of  personal  property.  To  determine  who  pays 
this  tax  we  must  go  even  a  step  farther  and  describe  it  as  a  tax 
on  land,  on  buildings,  on  certain  sorts  of  personal  property, 
and  on  certain  sorts  of  personal  property  owners. 

The  real  estate  tax  must  be  subdivided  into  the  land  tax  and 
the  buildings  tax  because  the  economic  effects  of  these  two 
taxes,  even  though  assessed  at  the  same  rate  and  as  one  tax, 
are  very  different.  The  part  of  the  tax  that  falls  on  land  is 
paid  by  the  landowner  whether  he  occupies  the  land  himself 
or  leases  it  to  another.  To  understand  why  this  must  be  the 
case  it  is  only  necessary  to  recall  how  the  rent  and  value  of 
pieces   of  land   are   determined.*     The   land    supply   of   the 

*  Cf.  Chapter  XII 


Incidence  of  a  Land  Tax  551 

country,  determined  broadly  spcakint,^  by  natural  conditions, 
is  divided  up  into  different  grades  and  each  piece  of  land 
commands  a  rent  depending  upon  the  demand  for  land  of  that 
grade  and  the  supply  of  such  land  and  other  land  that  might 
if  it  were  economically  desirable  be  devoted  to  the  same  econo- 
mic use.  Once  determined  by  the  competition  and  bargain-' 
ing  of  landowners  and  land-users  this  rent  will  be  changed 
only  if  some  cause  changes  cither  the  demand  for,  or  the 
supply  of  such  land.  Moreover  the  value  of  the  land  is  this 
rent  capitalised  at  the  current  rate  of  interest.  There  is  no 
means  by  which  the  landowner  can  shift  a  tax  on  land  pro- 
portioned to  its  rent  or  selling  value  to  the  lessor  or  user,  be- 
cause the  latter  is  already  presumably  paying  the  full  econo- 
mic rent  for  it.  If  asked  to  pay  more  he  or  some  one  in  the 
group  using  the  same  grade  of  land  will  use  instead  land  of 
somewhat  inferior  grade.  The  users  of  this  land  in  turn  if 
asked  to  bear  a  part  of  the  tax  will  move  to  the  land  of  still 
lower  grade.  Thus  the  attempt  to  shift  the  tax,  there  having 
been  no  increase  in  the  demand  for  land — and  there  is  noth- 
ing in  the  imposition  of  a  tax  to  cause  such  an  increase — ,  is 
opposed  by  a  moving  away  of  lessors  who  are  already  paying 
all  they  are  willing  to  pay.  This  resistance  will  continue  until 
some  have  withdrawn  entirely  from  the  area  over  which  the 
tax  extends,  with  the  result  that  land  which  was  formerly  oc- 
cupied will  be  untenanted.  The  only  way  in  which  the  land- 
owners can  recall  the  old  tenants  or  attract  new  ones  is  by 
offering  the  land  at  the  old  rental,  that  is.  abandoning  the  at- 
tempt to  shift  the  tax  to  other  shoulders. 

This  result  is  often  concealed  in  consequence  of  the  fact 
that  the  community  in  which  the  tax  is  imposed  is  growing 
and  rents  are  advancing  because  the  demand  for  land  is  in- 
creasing. If  the  land  tax  is  small,  the  rise  in  rent — which 
would  have  occurred  in  any  case — may  reimburse  landlords 
for  the  tax  and  give  them  the  impression  that  they  are  shift- 
ing it  to  their  tenants.  What  they  are  really  doing,  however, 
is  paying  it  themselves  by  foregoing  the  absolute  increase  in 
the  income  they  derive  from  their  land,  which  would  have 
been  theirs  had  no  land  tax  been  imposed.  The  conclusion  to 
which  we  are  brought,  therefore,  is  that  a  land  tax  must  be 


Example 


552     Government  Expenditures  and  Revenues 

paid  by  landowners  because  it  tends  neither  to  increase  the 
demand  for  land  nor  to  reduce  the  supply,  and  it  is  only  by 
increasing  the  demand  or  reducing  the  supply  that  the  tenants 
generally  can  be  forced  to  pay  higher  rents. 
Capitali-  §  307.  The   land   tax   has   another  peculiarity.     Since  the 

Land  Taxes  value  of  a  piece  of  land  is  its  rent  capitalised  at  the  current 
rate  of  interest,  the  imposition  of  a  tax  that  is  to  be  collected 
year  after  year  reduces  the  value  of  the  land  by  an  amount 
equal  to  the  tax  capitalised  at  the  current  rate  of  interest,. 
Generally  speaking,  land  is  looked  upon  as  an  investment  and 
will  command  that  price  that  makes  its  return  equal  to  that 
to  be  obtained  from  other  investments  as  indicated  by  the  cur- 
rent rate  of  interest.  If  the  government  imposes  an  annual 
tax  and  thereby  takes  from  the  landowner  a  part  of  his  return 
it  reduces  the  value  of  the  land  as  an  investment  correspond- 
ingly. As  an  investment  the  land  is  now  worth  the  gross  rent 
less  the  annual  tax  capitalised  at  the  current  rate  of  interest. 

^" ,.  A  numerical   illustration   may   serve  to   make   this   clearer. 

Suppose  that  a  piece  of  land  affords  a  gross  rent  of  $6,000  a 
year,  that  the  government  imposes  a  tax  that  takes  $1,000  each 
year,  and  that  the  current  rate  of  interest  is  five  per  cent. 
Under  these  conditions  the  value  of  the  land  for  investment 
purposes  will  be  $100,000  or  the  sum  which,  if  invested  at  the 
current  rate  of  interest,  would  bring  in  $5,000.  the  net  return 
from  the  land.  If  the  tax  is  proportioned  to  the  value  of  the 
land  it  will  be  at  the  rate  of  one  per  cent.  Suppose  nov%^  the 
government  increases  the  land  tax  so  as  to  take  $1,200  from 
the  landowner  while  the  rate  of  interest  remains  at  five  per 
cent.  Under  these  new  conditions  the  net  return  from  the 
land  is  only  $4,800  and  its  value  only  $96,000,  The  tax  rate 
is  now  one  and  one-quarter  per  cent.  The  increase  in  the  tax 
rate  by  one  quarter  of  one  per  cent  not  only  lowers  the  an- 
nual return  to  the  owner  by  the  amount  taken  by  the  tax 
(that  is,  $200)  but  what  is  more  serious  it  lowers  the  value 
of  his  property  by  $4,000.  He  must  not  only  pay  the  tax  so 
long  as  he  continues  to  own  the  land  but  when  he  sells  it  he 
must  submit  to  a  reduction  in  the  price  which  causes  him  to 
pay  the  tax  for  all  time.  The  purchaser,  on  the  other  hand, 
who  acquires  the  land  with  full  knowledge  that  the  tax  must 


Conclusion  as  to  Land  Taxes  553 

be  paid  each  year  suffers  no  deduction  from  his  income  in 
consequence  of  the  tax.  Because  of  the  tax  he  obtains  the 
land  for  $96,000  or  the  sum  which  would  yield  the  $4,800  he 
is  to  receive  from  it  each  year  if  invested  at  the  current  rate 
of  interest.  If  the  tax  had  remained  at  the  old  rate  he  would 
have  had  to  pay  $100,000  for  it.  Had  there  been  no  tax  at  all 
it  would  have  been  worth  $120,000  as  the  return  would  then 
have  been  the  full  rent,  or  $6,000.  Thus  a  land  tax  is  paid  by 
the  landowner  upon  whose  land  it  is  imposed  not  only  while 
he  continues  to  be  owner  but  for  all  time.  It  amounts  to  a 
compulsory  reduction  in  the  value  of  his  property. 

§  308.  With  these  peculiarities  in  mind  what  are  we  to  say  An  Old 
of  a  tax  on  land  from  the  point  of  view  of  the  principle  that  Burdenless 
taxation  should  be  in  proportion  to  ability?  The  first  con- 
clusion to  be  drawn  is  that  no  tax  is  less  open  to  objection  than 
an  old  land  tax.  The  proceeds  of  such  a  tax  are  drawn  from 
the  rent  earned  bv  the  land.  After  the  tax  has  been  in  force 
for  a  number  of  years  and  the  laud  has  changed  hands  at 
least  once  at  the  new  valuation  caused  by  the  tax,  it  ceases  to 
impose  any  burden  whatever  upon  present  landowners.  The 
part  of  the  rent  which  it  diverts  to  the  use  of  the  government 
is  a  part  which  they  never  expected  to  control  themselves. 
The  remainder  affords  them  as  large  a  return  as  they  could 
have  obtained  from  any  other  line  of  investment,  and  they 
are  entirely  satisfied  with  the  arrangement.  It  is  for  these 
reasons  that  real  estate  owners  pay  their  taxes  with  so  little 
grumbling.  Nothing  would  surprise  them  more  than  to  have 
their  tax  rate  lowered — the  basis  of  assessment  remaining  the 
same — and  no  policy  would  be  so  unfair  to  other  tax-payers, 
since  it  would  amount  to  adding  gratuitously  to  the  value 
of  land  for  investment  purposes. 

A  new  or  a  higher  land  tax  is  a  verv  different  matter.     If  A  New 
,,  ,     .        .    "^  .  ,  ■      .  ,,      ^  Land  Tax 

the  population  is  growing  and  rents  are  going  up  the  tax  may  ^^^^  involve 

be  raised  gradually  without  unduly  burdening  landowners.  Confiscation 
Under  such  circumstances  the  higher  tax  merely  acquires  for 
the  government  the  increase  in  the  rent  leaving  the  land- 
owner's return  on  his  investment  undisturbed.  If  the  increase 
in  rent  has  not  been  anticipated  by  the  landowner  in  the  price 
he  paid  for  the  land  and  has   followed  general  changes  in 


554     Government  Expenditures  and  Revenues 

which  he  has  had  httle  or  no  part  its  appropriation  seems  en- 
tirely fair.  But  exactly  adjusting  a  rising  tax  rate  to  rising 
land  rents  is  a  matter  of  much  delicacy.  What  is  very  likelv 
to  happen  if  the  land  tax  is  raised  is  that  it  will  cut  into  the 
income  formerly  enjoyed  by  the  landlord  and  cause  his  land 
to  depreciate  in  value.  Such  a  policy  clearly  discriminates 
against  landowners  in  comparison  with  owners  of  other  sorts 
of  property.  Unless  it  is  combined  with  other  taxes  in  such 
a  way  that  landowners  are  not  singled  out  for  exceptional 
taxation,  it  violates  the  principle  that  taxation  should  be  in 
proportion  to  ability. 
Tax  on  §  309.  The  effect  of  a  tax  on  buildings  is  dift'erent  from 

Paid  ^b?^  ^^^^^  ^^  ^  ^'^-^  *-"^  ^^'^*-^  simply  because  the  supply  of  buildings 
Occupiers  may  and  in  course  of  time  will  be  controlled  by  man  with  a 
view  to  shifting  the  tax.  When  a  real  estate  tax  is  first  im- 
posed owners  of  buildings  will  have  to  bear  their  proportion 
of  it  as  do  owners  of  land.  It  will  not  cause  any  increase  in 
the  demand  for  buildings,  nor  immediately  any  decrease  in 
their  supply.  But,  unlike  land,  buildings  wear  out,  are  de- 
stroyed by  fire,  or  for  some  other  reason  have  to  be  replaced. 
In  a  progressive  community  there  is  added  to  the  need  of  re- 
placing old  buildings  a  demand  for  new  buildings  to  accommo- 
date the  growing  population.  If  owners  of  buildings  have  to 
pay  the  tax  on  them — even  when  they  own  them  as  invest- 
ments— the  erection  of  new  buildings  will  be  unprofitable  un- 
til the  lessened  supply  coupled  with  the  constant  or  increasing 
demand  causes  building  rents  to  rise  so  as  to  fully  cover  the 
tax.  When  this  has  occurred  the  erection  of  buildings  will 
again  be  entered  upon,  the  tax  having  been  shifted  from  the 
building  owner  to  the  occupier.  Thus  the  part  of  the  real 
estate  tax  which  falls  upon  buildings  tends  to  discourage 
building  operations  until  building  rents  have  risen  to  reim- 
burse the  owner  for  the  full  amount  of  the  tax.  Such  taxes 
are  paid,  as  soon  as  the  community  is  fully  adjusted  to  them, 
by  occupiers  or  lessors  rather  than  by  owners.  The  question 
whether  this  part  of  the  real  estate  tax  satisfies  our  canon  of 
fairness,  thus  reduces  to  the  question  whether  the  sort  of  a 
house  or  place  of  business  a  person  occupies  is  a  fair  index 
to  his  ability  to  contribute  to  the  support  of  the  government. 


Corporation  Taxes  555 

Generally  speaking  the  acceptance  of  this  basis  imposes  dis- 
proportionally  heavy  burdens  on  the  poorer  classes  in  the 
same  way,  but  not  to  the  same  extent,  as  do  other  taxes  fall- 
ing upon  consumers. 

§  "^lo.  Similar  in  effect  to  the  tax  on  buildings  is  the  tax  Tax  on 
on  any  special  form  of  personal  property  that  cannot  be  evaded  pafd^by^^ 
like  the  tax  on  mortgages  in  some  of  the  states.     At  first  such  Borrowers 
a  tax  makes  investments  in  mortgages  unprofitable  as  com- 
pared with  untaxed  investments.    The  balance  is  only  restored 
when  the  interest  on  mortgages  is  raised  by  the  full  amount 
of  the  tax  and  the  burden  is  shifted  to  borrowers.     It  needs 
no  extended  argument  to  prove  that  a  tax  upon  borrowers  in 
proportion  to  the  extent  of  their  indebtedness  has  little  re- 
lation to  the  principle  that  taxation  should  be  in  proportion 
to  ability. 

Even  more  obvious  is  the  injustice  of  what  remains  of  the  Injustice  of 
general  property  tax,  that   is,  the  tax  on   highly   scrupulous  Tajfon^ 
personal  property  owners,  who  obey  the  law  literally,  while  Personal 
their  friends  and  neighbours  take  advantage  of  the  many  easy 
means  of  evasion.     This  portion  of  the  tax   violates   every 
principle  of  fairness  and  reasonableness  and  brings  the  whole 
general  property  tax  of  which  it  is  a  part  into  merited  dis- 
repute. 

To  sum  up  our  conclusions  in  reference  to  the  general  Conclusions 
property  tax:  That  part  which  falls  upon  land,  if  the  tax  has 
been  long  in  operation  is  paid  out  of  rent  and  is  virtually 
burdenless  to  present  landowners ;  if  the  tax  is  new,  on 
the  other  hand,  unless  it  is  exactly  adjusted  to  gradually 
rising  rents,  this  part  imposes  a  special  burden  on  landowners 
which  is  only  fair  if  other  individuals  are  similarly  burdened 
at  the  same  time.  That  part  which  falls  upon  buildings  or 
any  other  special  form  of  investment  while  other  forms  of 
investment  are  permitted  to  escape  falls  upon  the  occupier  or 
borrower  as  distinguished  from  the  owner  or  lender.  Finally 
that  part  which  penalises  honesty,  unlike  the  rain,  falls  upon 
the  just,  but  not  upon  the  unjust. 

§  311.  Coi-poration    taxes,    the    next    important   source    of  Corporation 
state  revenue,  are  of  various  kinds.     We  may  distinguish  in- 
corporation  or   license   taxes,   franchise   taxes,   taxes   on   the 


The 

Incorpora- 
tion Tax 


Franchise 
Taxes 


The 

Capital 
Stock  Tax 


556     Government  Expenditures  and  Revenues 

capital  stock  and  bonded  debt,  gross  receipts  taxes,  net  income 
taxes,  and  special  franchise  taxes. 

The  incorporation  or  license  tax  is  the  tax  paid  for  the 
privilege  of  incorporation.  In  most  of  the  states,  it  is  merely 
a  fee ;  but  in  a  few  like  New  Jersey  whose  corporation  laws 
are  so  drawn  as  to  attract  organisers  of  corporations  from 
other  states,  it  is  an  important  source  of  revenue.  It  is  borne 
by  the  corporation  which  pays  it  and  is  universally  approved 
as  fair  and  reasonable. 

The  franchise  tax  is  a  tax  on  a  corporation  as  a  going  con- 
cern. As  distinguished  from  the  incorporation  tax  it  is  a 
payment  for  the  right  to  do  rather  than  merely  to  be.  In 
order  to  assess  the  franchise  it  is  necessary  to  adopt  some 
criterion  of  its  value  and  consequently  this  tax  merges  into 
the  more  specific  methods  of  taxing  corporations  next  to  be 
described.  The  legal  conception  of  a  franchise  tax  has  been  of 
the  greatest  importance  in  the  United  States  because  under  it 
the  courts  have  sustained  a  number  of  dififerent  ways  of  tax- 
ing corporations  which  would  hardly  have  been  approved  if 
looked  upon  merely  as  ways  of  taxing  property  or  income. 

Inability  to  reach  the  stocks  and  bonds  of  corporations  in 
the  hands  of  their  owners  through  the  general  property  tax 
has  caused  the  states  in  which  corporate  enterprises  are  most 
highly  developed  to  seek  for  other  methods  of  attaining  the 
same  end.  The  plan  most  commonly  adopted  is  to  tax  the  cor- 
porations themselves,  while  exempting  their  securities  in  the 
hands  of  owners.  The  first  step  in  this  direction  is  usually 
the  capital  stock  tax.  It  is  a  tax  on  the  actual  value  of  the 
capital  of  a  corporation,  determined  by  a  board  of  state 
assessors,  deduction  being  allowed  usually  for  real  estate, 
which  is  assessed  and  taxed  locally,  and  sometimes  for  bonded 
and  other  indebtedness,  which  in  such  cases  usually  escapes 
taxation  altogether.  In  its  most  highly  developed  and  most 
defensible  form,  it  is  a  tax  on  the  capital  stock,  whose  value 
is  determined  by  the  prices  at  which  its  shares  are  selling,  and 
the  bonded  indebtedness.  The  aggregate  value  of  the  stock 
and  bonds  of  a  corporation  represent  its  worth  as  a  going 
concern  from  the  point  of  view  of  the  business  community 
and  constitute   therefore  the   fairest  basis   for 


measuring 


its 


Gross  Receipts  Taxes  557 

ability  to  contribute  to  the  government,  so  long  as  property  is 
accepted  as  the  test  of  such  ability.  On  this  point  there  has 
been  a  good  deal  of  confusion  in  the  decisions  of  the  courts. 
Misled  by  the  analogy  of  private  indebtedness  judges  have 
sometimes  held  that  the  bonds  as  indications  of  debt  should  be 
subtracted  from  the  value  of  the  stock  to  determine  the  value 
of  the  corporation,  just  as  the  debts  of  an  individual  arc 
properly  deducted  from  his  assets  to  determine  what  he  is 
worth.  But  the  bondholders  of  a  corporation  are  really  part 
owners  in  the  corporation.  In  fact  it  not  infrequently  hap- 
pens that  their  bonds  represent  the  whole  value  of  the  cor- 
poration, the  stock  having  merely  a  nominal  value.  The  stock- 
holders' interest  in  turn  is  an  interest  in  what  is  left  after  the 
claim  of  the  bondholders  has  been  satisfied.  Thus  the  cri- 
terion of  the  taxable  ability  of  a  corporation  is  not  stock  less 
bonds,  but  stock  and  bonds. 

A  tax  on  the  capital  stock  and  bonded  indebtedness  of  cor-  Advantages 
porations,  exemption  of  these  forms  of  personal  property  in  Kondrand 
the  hands  of  owners  being,  of  course,  allowed,  goes  far  to-  Stock 
wards  correcting  one  of  the  most  glaring  abuses  of  the  general 
property  tax.  Such  a  tax,  if  applying  to  all  corporations, 
serves  no  doubt  to  lessen  the  attractiveness  of  the  corporate 
form  of  organisation  to  investors  and  to  lead  them  to  prefer 
at  times  the  partnership  or  individual  entrepreneur  forms  un- 
der which  evasion  of  the  property  tax  is  comparatively  easy. 
This,  however,  is  a  small  matter  in  comparison  with  the  ad- 
vantages of  such  taxation.  It  falls  equally  upon  all  of  those 
who  avail  themselves  of  the  privilege  of  incorporation  and  it 
prevents  that  privilege  from  being  too  lightly  embraced.  It 
brings  in  large  revenues  to  the  state  treasuries  and  enables 
them  to  dispense  with  other  and  less  defensible  taxes.  Finally 
it  is  a  step  away  from  the  outgrown  general  property  tax  in 
the  direction  of  dependence  upon  special  privilege  taxes  that 
can  be  easily  and  fairly  assessed  and  collected. 

§  3T2.  Gross  receipts  taxes  are  another  form  of  corporate  Gross 
taxation   that   has   come   into   being   in    consequence    of  the  Taxes 
feeling  that  these  organisations  escape  their  fair  share  of  the 
tax  burden.     They  have  been  applied   in  different   states  to 
insurance   companies,    express    and    railway    companies,    and 


55^     Government  Expenditures  and  Revenues 

street  railway  companies.  The  principal  justification  for 
them  is  the  comparative  ease  with  which  they  may  be  assessed 
and  collected  and  the  large  revenues  which  they  may  be  made 
to  yield.  From  the  point  of  view  of  fairness  in  apportioning 
tax  burdens  not  much  is  to  be  urged  in  their  favour.  The  test 
of  ability  to  pay  taxes  is  not  gross  receipts  but  net  income.  Of 
the  former  one  company  may  be  required  to  spend  nine-tenths 
upon  expenses  of  operation  while  another  company  spends 
only  three-fourths.  It  is  what  is  left  in  both  cases  that  meas- 
ures tax  paying  ability,  not  the  gross  returns.  This  objection 
has  less  force  when  applied  to  businesses  like  that  of  insurance 
in  w^hich  the  relation  between  gross  receipts  and  net  income  is 
fairly  constant.  When  limited  to  businesses  of  this  sort  and 
made  to  apply  at  a  rate  determined  by  the  ascertained  relation 
between  gross  receipts  and  net  income  in  typical  instances, 
the  administrative  advantages  of  the  tax  probably  justify  its 
existence. 
Net  Income  §  3 1 3.  The  reasons  for  the  adoption  of  the  gross  receipts 
^^^^  tax  become  evident  from  a  study  of  the  history  of  the  next 

form  of  corporate  tax,  that  on  net  income.  This  tax  has  also 
been  applied  to  insurance  and  transportation  companies  by 
different  states.  It  assumes  a  variety  of  forms  sometimes  ap- 
plying to  the  whole  net  income,  sometimes  only  to  that  part 
distributed  as  dividends  above  a  certain  rate  per  cent.  A  tax 
on  the  net  income  or  earnings  of  corporations  w^ould  seem  at 
first  thought  an  ideal  method  of  compelling  them  to  contrib- 
ute to  the  government  in  proportion  to  their  ability.  It  is  out 
of  the  net  income  that  interest  and  dividends  are  paid  to  invest- 
ors and  it  is  these  that  measure  tax  paying  faculty.  The  diffi- 
culty is  that  in  practice  it  is  found  impossible  to  prevent  cor- 
porations from  concealing  their  true  net  earnings  when  the 
tax  system  offers  them  a  strong  inducement  to  do  so.  They 
may  do  this  by  charging  off  each  year  outlays  for  enlargement 
and  betterment  of  plant,  which  really  represent  new  invest- 
ments, by  paying  higher  salaries,  etc.,  than  market  conditions 
require,  or  by  deliberate  fraud  in  making  their  reports  to  tax 
assessors.  Unless  coupled  with  a  more  rigid  supervision  of 
methods  of  accounting  than  has  yet  been  adopted  in  the  United 
States  the  net  income  tax,  though  so  fair  on  its  face,  is  really 


The  Special  Franchise  Tax  559 

a  highly  unsatisfactory  source  of  revenue.  It  is  distinctly  in- 
ferior as  a  means  of  gauging  tax  paying  ability  to  the  com- 
bined capital-stock  and  bonded-debt  test. 

§  314.  The  special  franchise  tax  is  a  tax  upon  those  cor-  The  Special 
porations  which  enjoy  peculiar  privileges  in  connection  with  Tax"of^'New 
the  use  of  the  streets  or  other  public  property.  As  developed  York  State 
in  New  York  State  it  subjects  such  special  franchises  to  taxa- 
tion as  real  estate  and  is  thus  a  part,  though  a  peculiar  part,  of 
the  general  property  tax.  The  history  of  this  tax  is  interest- 
ing. As  is  well  known  few  corporations  have  proved  so  suc- 
cessful as  those  described  as  public  service  corporations,  that 
is,  gas,  electric  lighting,  street  railway,  telephone,  and  analo- 
gous companies.  Under  the  old  law  these  corporations  were 
subject  to  the  general  property  tax  like  individuals,  that  is, 
to  a  tax  on  their  real  estate  and  tangible  personalty.  When 
the  attempt  was  made,  however,  to  tax  them  also  on  their 
franchise  privileges,  which  had  become  enormously  valuable, 
on  the  ground  that  these  also  were  a  form  of  personal  property, 
the  courts  held  that  they  were  not  personal  property  for  pur- 
poses of  taxation.  In  this  dilemma  the  legislature  of  New 
York  State  passed  in  1899  the  so-called  Ford  Special  Fran- 
chise Tax  law,  which  declared  special  franchises  real  estate 
and  directed  the  state  board  of  tax  assessors  to  assess  them  as 
such.  After  a  long  legal  contest  the  act  was  sustained  not  only 
by  the  courts  of  the  State  of  New  York,  but  by  the  United 
States  Supreme  Court.  As  the  propriety  of  taxing  these  special 
privileges  as  they  become  valuable  along  with  other  property 
is  generally  conceded.  New  York's  plan  is  very  likely  to  be 
followed  by  other  states.  This  lends  more  than  local  interest 
to  the  question  of  the  efifect  of  such  taxes. 

Like  the  tax  on  land  a  tax  on  the  value  of-  a  special  and  Its  Resem- 
exclusive  franchise  must  be  paid  by  the  owner  of  the  fran-  i^^^!\^^2x 
chise.  The  imposition  of  the  tax  alters  in  no  respect  the  terms 
on  which  he  renders  his  service  to  the  community  ncir  the 
price  which  he  receives  for  that  service,  and  consequently  it 
cannot  be  shifted.  Moreover,  like  the  tax  on  land  the  special 
franchise  tax  is  capitalised  at  the  current  rate  of  interest  and 
deducted  from  the  value  of  the  franchise  as  an  investment. 
Thus  the  whole  burden  resulting  from  making  special   fran- 


560     Government  Expenditures  and  Revenues 

chises  subject  for  the  first  time  to  taxation  at  the  rate  applying 
to  other  property  falls  upon  the  investors  interested  in  special 
franchise  corporations  at  the  time  the  tax  goes  into  force. 
After  the  value  of  the  securities  of  such  companies  is  read- 
justed to  the  new  conditions  they  pass  to  new  owners  at  prices 
that  make  full  allowance  for  the  tax  and  consequently  the  tax 
is  not  felt  by  such  new  owners  as  a  burden.  We  thus  have 
here  another  instance  of  a  tax  that  becomes  virtually  burden- 
less  as  it  becomes  old. 

In  other  states  than  New  York  special  franchises  may  be 
taxed  as  personal  property,  if  the  courts  approve,  or  under 
franchise  taxes  applying  expressly  and  exclusively  to  them. 
But  however  they  may  be  designated  the  same  reasoning  ap- 
plies to  them  as  to  taxes  on  land.  When  first  levied  they  are 
capitalised  and  impose  a  serious  burden  on  the  franchise 
owners.  As  time  goes  on  and  new  owners  acquire  the  fran- 
chises they  become  burdenless,  so  far  as  investors  are  con- 
cerned. 
Liquor  §  315.  License  taxes  have  received  their  highest  develop- 

Taxes  ment  in  the  United  States  in  connection  with  efforts  to  control 

the  liquor  traffic.  Beginning  as  moderate  charges  for  the 
privilege  of  engaging  in  the  liquor  business  they  have  grown 
until  now  under  the  high  license  system  in  force  in  the  larger 
cities  they  require  the  annual  payment  of  $1,000  or  more  for 
the  privilege  of  maintaining  a  saloon,  and  of  proportionate 
amounts  for  that  of  engaging  in  other  branches  of  the  liquor 
business.  Space  will  not  permit  an  exhaustive  consideration 
of  the  effect  of  high  license  taxes  but  a  few  of  their  advan- 
tages may  be  emphasised.  They  are  easily  assessed  and  col- 
lected and  they  have  proved  a  source  of  large  revenue.  They 
compel  concentration  of  the  business  affected  into  fewer  es- 
tablishments and  this  makes  supervision  easier  and  more  effi- 
cient. The  economies  resulting  from  this  concentration  are 
so  great  that  it  may  be  doubted  whether  they  lessen  greatly 
the  profit  of  those  obtaining  licenses  on  the  one  hand  or  add 
appreciably  to  the  prices  charged  for  the  commodities  sold 
under  the  license  system  on  the  other.  Retail  trade,  whether  in 
liquors,  or  in  drugs,  milk,  ice,  groceries,  provisions,  or  even 
merchandise,  is  strikingly  wasteful  when  exposed  to  tlie  effects 


Inheritance  Taxes  561 

of  an  unregulated  competition.  The  needless  multiplication  of 
stocks  and  selling  places,  the  reckless  entry  into  the  field  of 
men  with  little  capital  and  less  experience  due  to  the  feeling 
that  "  any  one  can  keep  a  store  "  and  the  losses  which  result 
owing  to  the  fact  that  only  competent  persons  can  make  store- 
keeping  pay,  the  costly  duplication  of  distributing  machinery, 
— all  these  aspects  of  retail  trade  supply  telling  arguments 
against  a  competitive  organisation  of  industry.  The  high 
license  system,  although  not  primarily  intended  for  that  pur- 
pose, substitutes  regulated  for  unregulated  competition.  It  is 
believed  to  be  within  the  truth  to  claim  that  more  than  half  of 
the  revenue  that  the  government  derives  from  license  taxes  is 
wealth  that  without  the  moderate  regulation  the  system  im- 
poses would  have  been  wasted  in  a  vain  competition.  The  inci- 
dence of  the  remainder  of  the  tax  is  similar  to  that  of  excise  or 
customs  taxes.  In  the  case  of  liquor  licenses  a  part  of  it  is 
probably  borne  by  the  holder  of  the  license  and  part  of  it  by 
the  consuming  public  in  the  slightly  higher  prices  they  are  re- 
quired to  pay  for  the  same  quantity  and  quality  of  liquor. 

§  316.  Inheritance  taxes  are  becoming  a  very  common  Inheritance 
source  of  revenue  in  the  United  States  as  they  have  long  been  Taxes 
in  Europe.  The  question  who  pays  them  can  be  an- 
swered with  ease  and  certainty,  as  they  present  no  possibility 
of  shifting.  They  must  lessen  the  inheritance  and  in  this  way 
fall  upon  the  heir.  Their  payment,  unless  they  are  excessive, 
will  not  usually,  however,  be  looked  upon  as  a  burden.  Those 
who  inherit  property  usually  need  the  protection  of  the  govern 
ment  against  the  pretensions  of  other  claimants.  Theii 
thoughts  are  naturally  fixed  on  the  share  of  the  inheritance 
that  is  to  come  to  them,  and  if  the  inheritance  tax  is  an  es- 
tablished institution  they  are  apt  to  accept  it  as  a  fair  means 
of  compensating  the  state  for  its  part  in  securing  to  them 
whatever  may  be  left.  Inheritance  taxes  thus  combine  in 
unusual  degree  the  characteristics  of  a  good  form  of  taxation : 
they  may  be  easily  and  fairly  assessed  and  collected ;  they 
cannot  be  shifted  and  consequently  have  no  tendency  to  in- 
terfere with  business  relations ;  they  impose  little  or  no  felt 
burden  upon  those  out  of  whose  inheritances  they  are  paid. 
The  principal  difiiculty  that  arises  in  connection  with  their 


562      Government  Expenditures  and  Revenues 

use  is  to  decide  at  what  rate  they  should  be  imposed.  On  this 
point,  as  is  explained  in  the  next  chapter,  the  practices  of 
different  countries  vary  widely. 


REFERENCES  FOR  COLLATERAL  READING 

The  standard  American  treatise  on  public  finance  is  *  Adams's  The 
Science  of  Finance.  Equally  authoritative  for  the  financial  system 
of  the  United  Kingdom  is  Bastable's  Public  Finance.  In  connection 
with  these  volumes  should  be  read  the  special  treatises  on  taxation 
by  Seliginan  entitled:  *The  Shifting  and  Incidence  of  Taxation; 
♦Essays  in  Taxation;  and  Progressive  Taxation.  More  elementary 
treatises  also  written  with  special  reference  to  American  conditions 
are:  Daniels's  Elements  of  Finance  and  Plefm's  Introduction  to 
Public  Finance. 


CHAPTER  XXVIII 
TAXATION  AND  TAX   REFORM    IN  THE    UNITED  STATES 

§  317.  Before  attempting  to  discuss  the  effect  upon  the  dis-  Practical 
tribution  of  wealth  of  the  various  taxes  considered  in  the  last  Taxation 
chapter  and  to  formulate  suggestions  for  the  reform  of  the 
taxing  system  of  the  United  States,  it  will  be  well  to  review 
very  briefly  some  of  the  practical  aspects  of  the  more  important 
taxes  now  in  operation. 

The  tariff  system  of  the  United  States  has  already  been  dis-  The  Tariff 
cussed  at  some  length.*     In  its  present  form  it  may  be  fairly  united 
characterised  as  a  plan  bv  which  the  machinery  of  taxation  is  States 
employed  for  industrial  rather  than  for  fiscal  purposes.     From 
the  point  of  view  of  public  revenue  it  is  open  to  criticism  be- 
cause the  burden  which  it  imposes  upon  tax-payers  is  out  of 
all  proportion  to  the  income  which  it  affords  the  government. 
This  results  from  the  fact  that  the  principal,  and  of  course 
deliberately  intended,  effect  of  the  tariff  is  to  force  consumers 
to  buy,  not  foreign  goods  subject  to  the  duties,  but  domestic 
products  enhanced  in  price  because  of  the  duties.     This,  it  need 
hardly  be  said,  is  no  conclusive  argument  against  the  tariff, 
but  it  makes  its  discussion  merely  as  a  plan  of  taxation  en- 
tirely profitless. 

From  the  point  of  view  of  revenue  customs  duties  are  now  Ciistoms 
just   about   as   productive    in    the   United    States    as    internal  Revenue 
revenue  duties.    Thus  during  the  ten  years  1895  to  1904  cus-  Duties 
toms  duties  yielded  on  an  average  $211,600,000  a  year  as  com- 
pared witli  $221,900,000  from  internal  revenue  taxes.f  Because 
of  the  complexity  of  the  customs  tariff'  system  the  cost  of  col- 
lecting these  duties  as  reported  by  the  Secretary  of  the  Treas- 

*  Cf.  Chapter  XX. 

f  During  a  part  of  this  time  the  so-called  war  internal  revenue  duties 
imposed  in  connection  with  the  short  Spanish-American  war  were  in 
force,  so  it  may  be  inferred  that  the  two  sources  of  revenue  are  about 
equally  important. 

563 


5^4 


Taxation  and  Tax  Reform 


Advantages 
of  Internal 
Revenue 
System 


The  Sub- 
stitution of 
Corporation 
Taxes  for 
the   General 
Property- 
Tax 


ury  averages  nearly  double  the  cost  of  collecting  the  internal 
revenue  duties.  Thus  for  the  fiscal  year  ending  June  30,  1904, 
the  cost  of  collecting  the  former  equalled  3.3  per  cent  of  the 
receipts  and  of  the  latter  1.9  per  cent  of  the  receipts. 

§  318.  The  internal  revenue  system  of  the  United  States  is 
one  of  the  most  valuable  fruits  of  the  extraordinary  financial 
expedients  jnade  necessary  by  the  country's  wars.  Its  proved 
efficiency  and  economy  as  a  means  of  raising  revenue  now 
assure  it  a  permanent  place  in  the  taxing  system  of  the  country 
and  also  throv.^  upon  it  the  burden  of  providing  additional 
revenue  to  meet  emergencies  such  as  that  presented  by 
the  recent  Spanish-American  war.  Under  the  law  in  force 
July  I,  1905,  the  principal  commodities  subject  to  internal 
revenue  duties  were :  distilled  spirits,  manufactured  tobacco, 
fermented  liquors,  oleomargarine,  filled  cheese,  mixed  flour, 
and  adulterated  butter.  Of  these  only  the  first  three  are  taxed 
primarily  for  revenue  purposes  and  from  them  is  derived  more 
than  nine-tenths  of  the  revenue  received.  The  remarkable 
productiveness  of  these  taxes  on  liquors  and  tobacco  dem- 
onstrates the  ease  with  which  all  the  revenue  that  the  country 
requires  from  customs  duties  might  be  obtained  from  taxes 
on  these  same  commodities  and  on  the  few  important  articles 
that  are  not  produced  in  the  United  States  in  appreciable  quan- 
tities, such  as  cofifee  and  tea. 

One  reason  for  the  success  of  the  internal  revenue  system 
is  the  very  simple  stamp  device  by  means  of  which  the  taxes 
are  collected.  This  was  introduced  by  the  act  of  July  20,  1868, 
which  required  revenue  stamps  to  be  purchased  from  the 
government  and  to  be  attached  to  commodities  subject  to  the 
tax  in  such  a  way  that  they  must  be  broken  when  the  package 
or  barrel  was  opened.  By  this  simple  means  every  citizen  is 
put  in  a  position  to  knov/  whether  the  articles  that  come  under 
his  notice  have  satisfied  the  requirements  of  the  law  and  to 
act  as  an  efficient  assistant  of  the  tax  collector. 

§  319.  As  already  stated  the  general  property  tax  is  the 
chief  source  of  state  and  local  revenues  in  most  of  the  states. 
There  is  however  a  marked  tendency  in  stich  states  as  New 
York,  Massachusetts,  Pennsylvania,  and  New  Jersey  to  relin- 
quish this  source  of  income  to  the  local  governing  bodies,  the 


Unequal  Assessments  565 

states  depending  for  their  revenues  upon  corporation,  inheri- 
tance, and  Hcense  taxes.  One  reason  for  this  change  has  al- 
ready been  touched  upon.  With  the  great  increase  of  cor- 
porate wealth  and  corporate  securities  which  so  readily  evade 
taxation  in  the  hands  of  holders,  public  opinion  has  de- 
manded the  introduction  of  taxes  applying  directly  to  corpo- 
rations. As  these  have  been  developed  they  have  ^served  so 
well  as  sources  of  revenue  that  the  more  highly  organised  in- 
dustrial states  have  been  able  to  forego  the  income  formerly 
derived  from  the  general  property  tax. 

Another  reason  has  been  the  fact  that  the  general  property  Unequal 
tax  has  proved  even  more  unfair  as  a  source  of  state  than  as  a  menls " 
source  of  local  revenue.  The  assessment  of  this  tax  calls  for 
intimate  knowledge  of  local  conditions  and  has  consequently 
been  intrusted  to  local  assessors.  \Mien  the  assessments  of  the 
latter  have  determined  the  proportion  of  state  taxes  paid  by 
the  locality,  they  have  been  under  a  strong  temptation  to  under- 
value property  in  their  districts  so  that  the  tax  bills  of  their 
friends  and  neighbours  may  be  lower.  Wide  discrepancies 
have  thus  appeared  between  the  actual  and  the  assessed  value 
of  property.  According  to  a  careful  report  prepared  by  the 
Pennsylvania  Tax  Conference  referring  to  the  years  1891  and 
1892  the  assessed  value  of  real  estate  in  the  different  counties 
of  that  state  varied  all  the  way  from  only  20  per  cent  (Lucerne 
County)  to  93  per  cent  (Northumberland)  of  the  market 
value  as  indicated  by  actual  sales.  This  is  fairly  typical  of 
the  situation  produced  in  all  of  the  states  by  the  policy  of 
depending  upon  local  assessors  to  assess  property  for  purposes 
of  state  taxation.  To  lessen  the  great  injustice  that  would 
result  from  unequal  assessments  most  of  the  states  have  created 
state  boards  of  equalisation  whose  task  it  is  to  make  the  assess- 
ments uniform.  Notwithstanding  the  usually  efificient  work 
of  these  boards  inequalities  have  persisted  and  the  abandon- 
ment of  the  general  property  tax  for  state  purposes  has  proved 
the  only  certain  way  to  correct  the  evil. 

In  New  Jersey  and  Pennsylvania  the  states  have  desisted 
altogether  from  taxing  real  estate  for  state  purposes  and  in 
Pennsylvania  the  larger  part  of  the  proceeds  of  the  personal 
property  tax  still  collected  is  returned  to  the  counties  and  cities 


566 


Taxation  and  Tax  Reform 


Disadvan- 
tages of 
General 
Property 
Tax 


which  collect  it.  In  New  York  the  constitution  requires  the 
imposition  by  the  state  of  the  general  property  tax,  to  provide  a 
sinking  fund  for  the  canal  bonds  outstanding.  The  rate,  how- 
ever, has  been  reduced  to  the  lowest  point  permitted  by  this 
constitutional  restriction  (that  is.  13-100  of  a  mill)  so  the  tax 
has  ceased  to  be  of  any  special  consequence  to  the  state  govern- 
ment. 

§  320.  Although  the  general  property  tax  is  thus  losing  its 
importance  as  a  source  of  state  revenue,  its  position  as  the 
mainstay  and  dependence  of  local  governing  bodies  is  un- 
shaken. In  view  of  the  larger  revenues  needed  by  local  gov- 
ernments and  especially  by  the  cities,  this  makes  the  inequali- 
ties inherent  in  this  form  of  taxation  the  more  glaring.  The 
tax  rates  imposed  in  different  cities  range  all  the  way  from 
one  to  three  per  cent.  In  New  York  City  the  rate,  which  was 
for  many  years  over  two  per  cent,  has  been  lowered  as  a  result 
of  the  introduction  of  the  special  franchise  tax  and  of  the 
system  of  assessing  real  estate  at  its  full  value  instead  of  at 
only  65  per  cent  of  its  value  as  formerly  until  it  is  now  (1905) 
about  one  and  one-half  per  cent.  Even  this  rate  if  applied  as 
the  law  requires  to  such  personal  property  as  railroad  bonds 
would  in  some  cases  take  from  the  tax-payer  nearly  one-half 
of  his  income.  No  one  would  think  seriously  of  defending  an 
income  tax  which  imposed  such  a  heavy  burden  as  this  upon 
tax-payers  and  it  is  partly  because  the  tax  is  felt  to  be  so  dis- 
proportionally  high  on  those  owners  of  personal  property  who 
pay  it  that  public  opinion  fails  to  condemn  very  severely  those 
who  do  not.  Thus  the  wholesale  evasion  of  the  tax  by  the  vast 
majority  of  owners  of  personal  property  makes  the  assessed 
value  of  such  property  but  a  fraction  of  the  actual  value. 
The  low  assessment  in  turn  necessitates  a  high  rate  of  taxation 
if  the  needed  revenue  is  to  be  secured.  This  high  rate  is  an 
obvious  injustice  to  those  who  are  conscientious  about  paying 
the  tax  and  serves  to  increase  the  number  who  determine  to 
evade  it  altogether.  This  is  the  vicious  circle  in  which  the  at- 
tempt to  tax  personal  property  has  involved  most  American 
communities  and  there  is  no  way  of  escape  from  it  short  of 
the  frank  abandonment  of  this  species  of  taxation. 

§  321.  The  present  financial  system  of  the  State  of  New 


Corporation  Taxes  567 

York  is  fairly  typical  of  the  form  whicli  state  finances  seem  The  Taxing 
likely  to  assume  all  over  the  country.     During-  the  year  ending  ^^e^^J,^Yor^ 
September  30,  1904.  the  income  of  the  state  from  all  sources  State 
equalled  $25,500,000  and  of  this  sum  $21,500,000,  or  nearly  85 
per  cent,  was  derived  from  three  sources :    the  taxes  oii  cor- 
porations ($7,030,000),  the  tax  on  inheritances  ($5,430,000), 
and  liquor  license  taxes  ( $9 ,040,000 ).''• 

The  taxes  imposed  on  corporations  are  usually  described  as  Corporation 
franchise  taxes,  but  assunie  a  great  variety  of  forms.      The 
principal  taxes  in  force  January  i,  1905,  were: 

( 1 )  An  incorporation  tax  of  one-twentieth  of  one  per  cent 
of  the  authorised  capital. 

(2)  A  general  corporation  or  franchise  tax  equal  to  one- 
quarter  of  a  mill  for  each  one  per  cent  of  dividends  declared 
on  capital  stock  employed  within  the  state  if  such  dividends 
equal  or  exceed  six  per  cent  of  the  par  value  of  such  capital 
stock.  If  the  dividends  are  below  six  per  cent  the  tax  is  one 
and  one-half  mills  on  the  value  of  the  capital  stock  employed 
in  the  state. 

(3)  A  tax  of  one  per  cent  on  the  capital  and  surplus  of  banks 
and  trust  companies  and  on  the  surplus  and  undivided  profits 
of  savings  banks. 

(4)  A  tax  of  one  per  cent  on  the  gross  premiums  of  in- 
surance companies. 

(5)  A  tax  of  one-half  of  one  per  cent  on  the  gross  receipts 
from  business  done  within  the  state  of  steam  surface  railroad, 
canal  steamboat,  ferry,  express,  navigation,  pipe  line,  transfer, 
baggage  express,  telegraph,  telephone,  palace  car,  and  sleeping 
car  companies  and  other  corporations  engaged  in  transporta- 
tion and  not  enumerated  under  (6). 

(6)  A  tax  of  one  per  cent  on  the  gross  receipts  of  elevated 
and  surface  railroads  not  operated  by  steam,  and  water,  gas, 
and  electric  lighting,  heating,  and  power  companies,  plus  a  tax 
of  three  per  cent  on  the  dividends  in  excess  of  four  per  cent 
on  the  paid-in  capital  declared  by  such  companies. 

It  will  be  seen  that  these  taxes  impose  considerable  burdens 

*  In  1905  the  state  legislature  added  two  new  ta.xes:  a  stamp  duty  of 
two  cents  on  every  share  of  stock  sold  and  a  tax  of  one-half  of  one  per 
cent  on  mortgages.  It  is  doubtful,  however,  wlicther  either  of  these 
will  be  retained  as  permanent  features  of  the  taxing  system. 


568  Taxation  and  Tax  Reform 

upon  all  classes  of  corporate  enterprises.  The  chief  respect  in 
which  they  are  open  to  criticism  is  in  accepting  gross  receipts 
as  an  indication  of  tax  paying  ability  and  in  failing  to  provide 
for  the  taxation  of  the  bonds  of  corporations.  A  fairer  plan 
of  taxation  would  be  that  already  referred  to  which  takes  the 
business  man's  valuation  of  the  whole  corporate  enterprise  as 
indicated  by  the  current  prices  of  its  bonds  and  stocks  as  the 
•  criterion  of  tax  paying  ability  and  taxes  it  at  a  uniform,  rate. 
This  plan  has  been  sanctioned  by  the  courts  even  in  connection 
with  the  taxation  of  corporations  engaged  in  interstate  com- 
merce when  some  reasonable  plan  {e.  g.,  proportional  mileage 
within  the  state)  for  determining  what  part  of  this  value  is 
located  within  the  state  has  been  adopted.  Besides  affording 
a  fairer  basis  of  assessment,  this  plan  has  the  merit  of  taxing 
investors  inteiested  in  corporations  as  owners  of  bonds  as  well 
as  stock  holders.  Under  the  New  York  system  the  former  still 
escape  all  taxation,  except  when  they  conscientiously  return 
their  bonds  for  the  personal  property  tax.  This  is  unjust 
whether  regarded  from  the  point  of  view  of  the  majority  who 
evade  the  tax  or  that  small  minority  which  pays  it. 
The  Special  §  322.  In  addition  to  the  corporation  taxes  that  have  been 
Tax  described,  New  York  has  the  peculiar  tax  on  special  franchises 

as  real  estate  discussed  in  a  previous  section.  Although  of  no 
great  importance  as  a  source  of  state  revenue,  since  the  state 
tax  on  general  property  is  now  so  small,  this  has  proved  a  very 
valuable  resource  for  the  cities  of  the  state.  Its  importance 
for  New  York  City  alone  may  be  judged  from  the  fact  that 
the  assessed  value  of  the  special  franchises  of  the  public  ser- 
vice corporations  making  use  of  its  streets  in  1905  was  fixed  at 
$;302,ooo,ooo.  With  a  tax  rate  of  one  and  one-half  per  cent 
this  means  a  yield  of  $4,500,000  unless  some  of  the  assessments 
are  reduced  on  appeal.  Adding  this  to  the  taxes  paid  by  these 
same  companies  on  their  real  estate  and  directly  to  the  state 
as  ordinary  franchise  taxes,  it  appears  that  considerable  prog- 
ress has  been  made  toward  making  these  monopolistic  busi- 
nesses  bear  their  proportion  of  the  tax  burden. 
Inheritance  §  323.  The  first  inheritance  tax  imposed  by  an  American 
Unk?d  "^  state  was  through  an  act  passed  by  the  legislature  of  Pennsyl- 
States  vania  in  1826.     It  applied  only  to  collateral  inheritances  as 


Inheritance  Taxes  569 

do  the  inheritance  taxes  now  imposed  by  sixteen  of  the  thirty 
states  which  have  availed  themselves  of  this  source  of  revenue. 
As  now  levied  inheritance  taxes  assume  all  degrees  of  com- 
plexity from  the  simple  tax  of  five  per  cent  on  all  inheritances 
passing  to  collateral  heirs  and  strangers  in  blood  of  \^irginia, 
Missouri,  and  Arkansas,  three  of  the  states  which  do  not  tax 
direct  inheritances  at  all,  to  the  elaborate  classified  tax  adopted 
by  the  legislature  of  Wisconsin  in  1903.  The  latter  distin- 
guishes five  classes  of  heirs  and  makes  them  subject  to  taxes 
progressing,  in  the  case  of  direct  heirs,  from  one  per  cent  to 
three  per  cent,  and  in  the  case  of  collateral  heirs  and  strangers 
in  blood  from  five  per  cent  to  fifteen  per  cent  according  to  the 
size  of  the  estate.  Exemptions  of  varying  amounts  ranging 
from  $100  in  case  of  the  last  class  to  $10,000  in  the  case  of 
widows  are  also  allowed.  From  the  point  of  view  of  revenue 
the  inheritance  tax  of  New  York,  which  is  at  the  rate  of  one 
per  cent  on  estates  above  $10,000  passing  to  direct  heirs  and 
to  brothers  and  sisters  and  sons  and  daughters-in-law,  and  at 
the  rate  of  five  per  cent  on  other  inheritances  above  $500,  is 
most  productive,  realising  for  the  state  treasury  from  four  to 
six  million  dollars  annually.  The  only  other  state  which  de- 
rives as  much  as  a  million  dollars  a  vear  from  this  source — the 
productiveness  of  Wisconsin's  tax  not  yet  having  been  fully 
tested — is  Pennsylvania. 

Comparing  these  results  with  those  attained  in  foreign  coun-  And 
tries  which  tax  inheritances,  it  would  appear  that  the  United  ^°^ 
States  has  only  just  begun  to  test  the  possibilities  of  this  form 
of  taxation.  Great  Britain  in  1900,  a  fairly  typical  year,  de- 
rived a  revenue  of  some  $92,000,000  from  her  different  taxes 
on  inheritances,  or  nearly  one-fifth  of  her  total  national  revenue 
from  taxation.  Franc?  obtains  from  this  source  some  $40,- 
000,000  annually  or  about  nine  per  cent  of  her  national  revenue, 
exclusive  of  that  from  the  state  monopolies.  Even  more  sig- 
nificant is  a  comparison  of  the  per  capita  returns  from  these 
taxes  in  different  countries.  A  table  prepared  by  Professor 
Millis  *  comparing  the  returns  from  inheritance  taxes  for  the 
years  1899  to  1901  shows  that  Great  Britian  derives  some  $2 
per  capita  annually  from  this  source  and  France  over  $1.  The 
*  Qitarterly  Journal  of  Economics,  Vol.  XIX.,  p.  308. 


S70 


Taxation  and  Tax  Reform 


Justification 
for  Pro- 
gressive 
Rates 


Inheritance 
Taxes  Im- 
pose Slight 
Burden  on 
Heirs 


per  capita  return  for  New  York  State,  on  the  other  hand,  was 
only  forty-nine  cents,  for  Pennsylvania  twenty  cents,  and  for 
the  majority  of  the  states  which  have  inheritance  taxes  less 
than  ten  cents. 

The  principal  reason  for  the  larger  returns  of  these  taxes  in 
Great  Britain  and  France  is  that  both  apply  the  progressive 
principle  in  somewhat  the  same  way  as  does  the  Wisconsin  law. 
Thus  the  highest  rate  in  Great  Britain  on  very  large  estates 
passing  to  distant  relatives  or  strangers  in  blood  is  19  1-2  per 
cent  and  the  highest  rate  in  France  20  1-2.  These  rates  are 
justified  on  two  grounds.  First,  it  is  asserted  that  from  the 
point  of  view  of  the  heir  it  is  not  what  the  government  takes 
but  what  is  left  that  is  significant  and  that  when  the  estate  is 
large  the  government  may  take  even  one-fifth  of  the  whole 
amount  without  imposing  too  heavy  a  burden.  Second,  it  is 
believed  that  from  the  point  of  view  of  the  testator  the  pros- 
pect of  leaving  property  to  distant  relatives  or  strangers  plays 
but  a  small  role  as  a  motive  to  accumulation  and  that,  con- 
sequently, such  progressive  rates  have  little  or  no  tendency  to 
discourage  saving. 

§  324.  The  validity  of  the  first  justification  will  hardly  be 
questioned  when  the  relation  of  the  state  to  property  left  at 
death  is  considered.  Such  property  does  not  belong  by  abso- 
lute right  to  any  one.  In  modern  communities  the  right  of 
disposing  of  property  after  death  is  recognised  and  protected 
but  always  under  definite  limitations  designed  to  promote  the 
general  well-being.*  Wives  have  certain  rights  in  the  estates 
of  their  husbands  of  which  they  cannot  be  deprived  by  will.  In 
most  countries  children  also  have  certain  rights  which  the  state 
undertakes  to  safeguard.  The  law  properly  protects  the  owner 
of  property  in  its  full  enjoyment  during  his  lifetime,  even  to 
the  extent  of  putting  no  obstacle  in  his  way  if  he  wishes  to 
distribute  it  among  his  family  or  friends  before  his  death. 
When  he  dies,  however,  the  disposition  of  the  property  which 
he  preferred  to  retain  as  his  own  to  the  very  end  assumes  large 

♦  This  right  is  essentially  modern.  It  is  not  necessary  to  go  back 
very  far  in  the  evolution  of  law  to  find  property  left  at  death  reverting 
to  the  state  or  ruler  as  a  matter  of  course.  Cf.,  Ely,  Evolution  of  In,' 
diistrial  Society,  Chapter  on  Inheritance  Taxes. 


Merits  of  Inheritance  Taxes  571 

social  significance.  No  one  now  has  a  claim  upon  it  compar- 
able from  the  scJcial  or  legal  point  of  view  with  that  which  has 
been  dissolved  by  the  death  of  the  owner.  But  his  "  dead 
hand  "  cannot  be  permitted  to  determine  what  shall  become  of 
it  regardless  of  the  interests  of  the  living.  In  fact  the  interests 
of  the  living  are  now  the  paramount  consideration.  The  heirs 
designated  in  the  will  of  the  deceased,  if  he  has  made  a  will, 
are  entitled  to  receive  that  part  and  only  that  part  of  the  estate 
which  the  law  permits.  If  he  has  made  no  will  then  the  ques- 
tion of  the  division  of  the  property  is  one  for  the  law  alone  to 
determine.  The  imposition  of  an  inheritance  tax  is  simply  the 
assertion  by  the  state  of  a  right  to  a  share  in  property  left  at 
death  under  the  conditions  set  forth  in  the  tax  law.  If  the  share 
taken  by  the  state  is  moderate,  there  is  every  reason  to  think  that 
the  heirs  will  accept  it  as  a  matter  of  course  and  think  grate- 
fully of  the  part  that  is  left  to  themselves  rather  than  grudg- 
ingly of  the  part  which  they  do  not  receive.  There  thus  ap- 
pears to  be  good  ground  for  the  claim  that  moderate  inheri- 
tance taxes  increasing  from  one  per  cent  on  inheritances  above 
a  certain  amount  left  to  direct  heirs  even  to  as  much  as  twenty 
per  cent  on  very  large  estates  passing  to  collateral  heirs  or 
strangers  do  not  impose  a  burden  that  is  consciously  felt  by 
any  one.  They  certainly  do  not  impose  a  burden  on  the  tes- 
tator as  he  is  dead ;  almost  as  certainly  they  do  not  impose  a 
burden  upon  the  heir  as  he  is  usually  too  much  interested  in 
what  he  receives  to  feel  the  loss  of  the  portion  retained  by  the 
government. 

The  second  contention,  that  is.  that  moderate  taxes  of  this  P/^^J 

'  Merits 

kind  do  not  discourage  the  accumulation  of  property,  must 

be  accepted  with  some  qualifications.  What  may  be  claimed 
with  confidence  is  that  the  discouragement  will  be  too  slight 
to  offset  to  any  considerable  degree  the  fiscal  advantages  of 
such  taxes.  The  motives  that  lead  to  the  accumulation  of 
property  are  strong  and  are  each  year  growing  stronger. 
There  is  little  danger  that  moderate  taxes  imposed  upon  inheri- 
tances will  retard  appreciably  the  accumulation  of  the  fund  of 
capital  upon  which  the  efficiency  of  industrial  processes  so 
largely  depends.  Thus  from  every  point  of  view,  the  taxation 
of  inheritances,  if  not  pushed  too  far,  appears  to  satisfy  the 


572 


Taxation  and  Tax  Reform 


The  Income 
Tax  in  the 
United 
Kingdom 


Extent  of 
Evasions 


requirements  of  just  and  reasonable  taxation.  Such  taxes  are 
easy  to  assess  and  collect.  They  cannot  be  shifted  and  yet 
they  impose  little  or  no  burden  upon  those  whose  inheritances 
are  lessened  in  consequence  of  their  existence.  Finally,  they 
have  no  bad  eiTects  upon  industrial  society,  comparable  with 
the  revenue  which  they  afford  to  the  state.  Under  these  cir- 
cumstances it  is  not  surprising  that  they  are  coming  to  be 
important  sources  of  income  in  nearly  all  progressive  countries. 

§  325.  In  addition  to  the  taxes  which  have  been  discussed 
there  is  one  which  merits  serious  consideration  because  of  the 
prominent  place  it  occupies  abroad,  that  is,  the  mcomc  tax. 
The  similarity  between  the  two  countries  makes  the  operation 
of  this  tax  in  the  United  Kingdom  of  most  interest  to  students 
of  taxation  in  the  United  States.  As  there  assessed  it  is  a  tax 
at  a  uniform  rate  on  incomes  from  all  sources,  the  latter  being 
classified  for  convenience  of  assessment  under  five  schedules. 
One  of  its  principal  characteristics  from  the  point  of  view  of 
administration  is  the  full  use  made  of  the  device  known  as 
"  stoppage  at  the  source."  For  example,  the  tax  is  deducted 
from  the  salaries  of  public  officials  and  from  the  interest  on  the 
public  debt  before  payment  is  made  to  those  entitled  to  receive 
income  from  these  sources.  Again,  corporations  are  required 
to  deduct  the  tax  from  the  interest  and  dividends  which  they 
pay  to  their  bond  and  share  holders.  Finally,  even  the  financial 
agents  who  collect  incomes  from  the  bonds  or  stocks  of  foreign 
corporations  are  required  to  report  the  amounts  collected  and 
the  names  of  their  clients  to  the  government  before  they  sur- 
render the  income  to  those  to  Vvhom  it  belongs. 

Notwithstanding  the  high  development  of  this  method  of 
taxing  the  income  as  it  arises,  there  are  certain  sorts  of  income 
that  can  only  be  assessed  on  the  basis  of  the  personal  declara- 
tion of  the  recipient.  This  is  the  case  to  a  large  extent  as 
regards  income  from  foreign  investments  and  almost  wholly 
as  regards  income  from  "  trades  and  professions."  It  is  in 
connection  with  the  assessment  of  these  incomes  that  the  in- 
come tax  is  least  satisfactory.  What  proportion  escapes  assess- 
ment can  only  be  guessed  at,  but  all  authorities  agree  that  it 
is  considerable.  Thus,  according  to  the  estimate  of  Sir  Robert 
GiUen  the  returns  from  foreign  investments  received  by  in- 


The  British  Income  Tax  573 

habitants  of  the  United  Kingdom  equalled  in  1882  some 
seventy-five  and  in  1885  some  eighty-five  million  pounds  ster- 
ling. The  returns  assessed  under  the  income  tax  in  these  years 
amounted  to  only  thirty  and  thirty-five  million  pounds  respec-  , 

tively.  The  same  authority  estimates  that  in  1885  only  about 
eighty-five  per  cent  of  the  incomes  from  trades  and  professions 
which  were  subject  to  the  income  tax  were  honestly  reported. 
Although  it  is  impossible  to  say  what  proportion  of  the  total 
income  evades  taxation,  it  is  probably  well  within  the  truth  to 
put  it  at  ten  per  cent.*  Since,  however,  these  evasions  include 
a  variety  of  incomes  there  is  no  reason  to  think  that  they  in- 
volve any  shifting  of  the  tax  on  the  part  of  those  who  do  pay 
it,  as  would  be  the  case  if  incomes  from  some  one  special  trade 
or  profession  escaped  while  incomes  from  all  other  sources 
were  taxed. 

§  326.  From  the  point  of  view  of  revenue  the  income  tax  is  Revenue 
an  important  part  of  the  British  fiscal  system  not  only  because  income  Tax 
it  yields  in  ordinary  years  from  one-sixth  to  one-seventh  of 
the  entire  imperial  income,  but  because  in  time  of  emergency 
its  yield  can  be  largely  increased  by  simply  adding  to  the  rate 
of  taxation.  This  characteristic  of  the  tax  is  so  highly  appre- 
ciated that  it  is  now  voted  afresh  each  year  at  just  that  rate 
which  the  fiscal  requirements  of  the  government  make  desir- 
able. It  thus  serves  to  give  flexibility  to  the  public  revenues 
and  to  make  possible  a  more  exact  balancing  of  revenues  and 
expenditures  than  can  be  attained  by  countries  which  are  with- 
out some  such  elastic  source  of  income.  The  tax  is  so  drafted 
as  to  allow  only  moderate  exemptions — in  1904  an  exemption 
of  $800  on  incomes  under  $2,000.  of  $750  on  incomes  between 
$2,000  and  $2,500.  of  $600  on  incomes  between  $2,500  and 
$3,000  and  of  $350  on  incomes  between  $3,000  and  $3,500,  but 
no  exemption  on  incomes  above  $3,500.  The  rate  has  varied 
considerably  in  recent  years  in  consequence  of  the  extraordinary 
expenditures  necessitated  by  the  Boer  War.  For  the  six  years 
1895  to  1900  it  was  maintained  at  eight  pence  in  the  pound 
(that  is,  3  1-3  per  cent).  In  1901  it  was  advanced  to  one  shil- 
ling in  the  pound,  or  five  per  cent,  and  it  has  since  (in  1903) 
been  as  high  as  one  shilling,  three  pence  in  the  pound,  or  6  1-4 
*  Cf.,  Hill,  The  English  Income  Tax,  pp.  382-387. 


574  Taxation  and  Tax  Reform 

per  cent.     In  the  latter  year  the  tax  brought  in  nearly  one^ 

fourth  of  the  entire  imperial  revenue ;  and  it  is  a  clear  evidence 

of  the  efficiency  of  the  administrative  machinery  by  v^'hich  it 

is  assessed  that  there  was  no  perceptible  increase  in  the  extent 

to  which  the  tax  was  evaded,  notwithstanding  the  unusually 

high  rate  of  taxation. 

State  S  -227.  In  the  United  States  income  taxes  have  been  em- 

Income  ,,,,,,  ,      ,         r     1         1  A  1 

Taxes  ployed  by  both  the  state  and  the  federal  governments.     Alto- 

gether some  sixteen  states  have  imposed  this  tax  at  some  period 
of  their  history,  but  of  these  only  six  continued  to  use  it  Jan- 
uary I,  1903.*  The  principal  defect  in  the  tax  as  a  state  tax 
is  that  it  is  impossible  to  assess  it  fairly  and  that  when  it 
is  imposed  it  has  a  tendency  to  drive  persons  with  large  incomes 
into  other  states  where  no  such  tax  is  found.  It  seems  clear 
from  American  experience  that  such  a  tax  must  be  national  in 
its  scope,  if  it  is  to  be  even  approximately  just  in  its  practical 
operation. 
The  Federal  Reference  has  already  been  made  to  the  country's  experience 
Income  Tax  ^^^j^j^  ^  federal  income  tax.  During  the  Civil  War  when  Con- 
gress was  making  use  of  every  possible  form  of  taxation  an 
income  tax  was  imposed  which  was  continued  in  force  from 
1863  to  1873.  Although  somewhat  crudely  devised  and  never 
very  efficiently  administered  this  tax  brought  into  the  Treasury 
in  1866,  the  year  of  largest  yield,  nearly  $73,000,000.  On  the 
strength  of  this  experience  the  tariff-reforming  Congress 
elected  in  1892  included  an  income  tax  as  a  prominent  feature 
of  the  revenue  law  passed  two  years  later  and  commonly  re- 
ferred to  as  the  Wilson  Act.  This  tax  was  at  the  uniform  rate 
of  two  per  cent  and  applied  to  the  net  incomes  of  corporations 
as  well  as  to  those  of  individuals.  The  latter  were  allowed  an 
exemption  of  $4,000.  It  was  thus  practically  a  tax  on  the  well- 
to-do  from  which  persons  in  moderate  circumstances  were 
exempt — except  as  they  were  investors  in  corporate  enterprises 
— and  was  justified  on  the  ground  that  other  federal  taxes, 
that  is,  customs  and  excise  duties,  fall  chiefly  on  the  poor. 

The  Income       How  successful  this  tax  might  have  been  as  a  means  of  rais- 
Tax  of  1S94     .  .,,  ,      1      "  •  •.  J     1        J 

Unconstitu-   ^^S  revenue  will  never  be  known,  smce  it  was  declared  uncon- 

*  C/.,   Kinsman,    T/ie   Income   Tax    in   the  CoiJtmonwealths  of  the 
United  States,  pp.  no  et  seq. 


A  Federal  Income  Tax  575 

stitutional  by  the  Supreme  Court  of  the  United  States  during 
the  first  year  of  its  operation  on  the  ground  that  it  was  a 
"  direct  "  tax  in  the  constitutional  sense  and  must  therefore  be 
api)ortionccl,  if  imposed  at  all,  according  to  the  population. 
Prior  to  1895,  in  interpreting  the  clause  of  the  Constitution 
requiring  that  direct  taxes  shall  be  laid  in  proportion  to  the 
population  the  Court  had  held  that  direct  taxes  meant  the  taxes 
known  as  direct  when  the  Constitution  was  adopted,  that  is, 
j)oll  and  land  taxes.  On  the  basis  of  this  view  it  had  sustained 
the  income  tax  of  the  Civil  War  period.  The  reversal  of 
opinion  was  by  a  divided  bench  and  has  been  criticised  not 
only  by  persons  who  favour  a  federal  income  tax  and  may 
therefore  be  considered  prejudiced,  but  by  eminent  lawyers 
who  oppose  it  but  who  think  that  the  older  view  of  the  Court 
was  more  in  harmony  with  correct  principles  of  constitutional 
interpretation.  Since  the  Supreme  Court  has  reversed  itself 
once  on  the  question  of  the  constitutionality  of  an  income  tax  it 
is  at  least  within  the  bounds  of  possibility  that  it  may  do  so 
again,  so  the  discussion  of  the  desirability  of  such  a  tax  for 
the  United  States  is  still  not  an  altogether  profitless  exercise. 

§  328.  The  principal  arguments  in  favour  of  a  federal  income  Arguments 
tax  are  the  fairness  of  such  a  tax  in  itself,  the  success  of  such  ^^^^fj^gt  a 
taxes  in  the  United  Kingdom,  Prussia,  and  other  European  Federal  In- 
states,  and  the  need  of  a  tax  that  will  fall  on  persons  of 
substance  as  a  supplement  to  the  customs  duties  and  excise 
taxes  already  imposed  which  fall  so  largely  on  the  wage- 
earning  class.  To  these  arguments  must  be  opposed  the 
following  considerations.  The  fairness  of  an  income  tax  is 
contingent  on  the  accuracy  with  which  it  is  assessed  and  col- 
lected. Unless  it  can  be  shown  that  evasions  will  be  few  and 
infrequent  it  may  reasonably  be  held  that  in  practice  such  a 
tax  will  be  extremely  unfair.  Neither  the  experience  of  the 
United  States  with  the  income  tax  during  and  after  the  Civil 
War  nor  a  consideration  of  the  conditions  that  are  necessary 
to  the  accurate  assessment  of  this  tax  is  especially  favourable 
to  its  re-introduction.  Nor  is  the  experience  of  other  govern- 
ments with  the  income  tax  of  nmoh  weight  as  an  argument  in 
its  favour.  A  system  of  taxation  that  would  suit  very  well 
small  and  homogeneous  countries  like  the  United  Kingdom  or 


57^  Taxation  and  Tax  Reform 

Prussia  might  be  quite  unworkable  in  the  United  States. 
There  is  not  only  the  immensely  greater  area  of  the  country 
to  be  taken  into  account,  but  the  diversity  of  business  condi- 
tions and  of  public  opinion  in  reference  to  federal  taxation. 
And  even  more  important  than  these  differences  in  connection 
with  the  administration  of  an  income  tax  is  the  different  rela- 
tion in  which  the  taxing  power  stands  towards  corporate  in- 
dustries. In  the  United  Kingdom  all  corporations  are  crea- 
tures of  Parliament  and  the  method  of  stoppage  at  the  source 
can  be  rigidly  enforced.  In  the  United  .States  corporations  are 
the  creatures  of  the  states,  not  of  Congress,  and  compelling 
them  to  pay  a  federal  income  tax  on  all  interest  and  dividends 
which  they  might  disburse  would  be  a  task  of  considerable 
difficulty.  When  these  and  other  differences  are  carefully 
weighed,  together  with  the  undoubted  dislike  of  the  people  of 
the  United  States  for  methods  of  taxation  to  which  the  term 
"  inquisitorial  "  may  be  justly  applied,  the  case  for  a  federal 
income  tax  is  materially  weakened. 

As  to  the  third  argument,  that  is,  the  need  of  offsetting  in 
some  way  the  unequal  burden  imposed  on  wage-earners  by 
customs  and  excise  taxes  something  will  be  said  in  the  next 
section.  At  this  point  it  will  suffice  merely  to  raise  the  question 
whether  an  industrial  community  which  maintains  generation 
after  generation  a  system  of  taxation  which  adds  largely  to 
the  expense  of  living  will  not  accommodate  itself  to  the  situa- 
tion by  advancing  correspondingly  its  standards  of  living.  If 
it  does  this  wage-earners  will  command  proportionally  higher 
wages  and  the  burden  imposed  upon  them  by  the  higher  ex- 
pense of  living  will  be  more  apparent  than  real. 

For  these  different  reasons,  it  would,  in  the  opinion  of  the 
writer,  be  unwise  to  ask  the  Supreme  Court  to  pass  again  upon 
the  constitutionality  of  an  income  tax  until  the  right  of  the 
federal  government  to  control  all  large  corporations  and  not 
merely  the  transportation  companies  engaged  in  interstate 
business  has  been  clearly  established.  Only  on  condition  that 
the  method  of  stoppage  at  the  source  could  be  widely  used  and 
that  the  law  was  so  drafted  as  to  have  the  support  of  educated 
public  opinion  could  a  federal  income  tax  be  accurately  and 
fairly  assessed.     Unless  so  assessed  such  a  tax  would  merely 


Taxation  and  Distribution  577 

repeat  on  a  national  scale  the  injustices  which  have  brought 
discredit  upon  the  personal  property  tax  in  every  state  in  the 
Union. 

§  329.  Tlie  question  of  the  effect  of  a  system  of  taxation  Place  of 
upon  the  distribution  of  wealth  is  closely  related  to  that  of  the  the^Theory^ 
shifting  and  incidence  of  taxes.  The  difference  may  be  illus-  "f  Distri- 
trated  by  reference  to  the  case  of  customs  and  excise  taxes  re- 
ferred to  in  the  last  section.  Such  taxes  are  paid  in  the  first 
instance  by  business  men,  importers  and  dealers,  who  look  upon 
them  as  items  in  their  expenses  of  production.  By  them  they 
are  usually  shifted  to  purchasers  and  ultimately  to  consumers 
upon  whom  they  finally  fall.  But  if  such  taxes  are  a  permanent 
feature  of  the  industrial  situation  the  higher  expenses  of  living 
which  they  cause  will  in  their  turn  call  for  higher  standards  of 
living,  as  regards  money  earnings,  on  the  part  of  the  wage- 
earning  population.  If  these  develop  money  wages  will  rise 
to  a  point  which  permits  the  enjoyment  of  the  same  real  wages 
as  were  secured  before  the  taxes  were  imposed.  Shall  we  say, 
then,  that  such  taxes  are  paid  by  wage-earners  or  that  they 
are  shifted  to  employers  who  must  pay  them  higher  w-ages? 
But,  if  we  are  to  follow^  them  to  employers  we  must  obviously 
continue  our  inquiry  and  determine  whether  the  latter  really 
bear  them  in  the  form  of  lower  profits.  The  matter  becomes 
so  complex  at  this  point  that  it  seems  better  to  say,  as  we  have 
already  done,  that  such  taxes  are  normally  paid  by  consumers, 
and  to  leave  their  effect  upon  the  distribution  of  wealth  for 
separate  consideration. 

The  relation  betw^een  taxation  and  distribution  is  usually 
treated  as  though  the  two  were  separate  and  distinct  processes. 
The  laws  of  distribution  are  explained,  as  has  been  done  in  this 
treatise,  with  the  conscious  omission  of  taxes  from  the  picture. 
Taxes  arc  then  brought  in  as  a  means  by  which  incomes  already 
distributed  are  laid  under  tribute  so  that  the  government  may 
be  maintained.  Although  a  convenient,  this  is  a  somewhat 
misleading,  account  of  the  matter.  The  government  asserts  its 
[claim  not  after  all  other  claimants  have  been  satisfied  but  as 
promptly  and  even  more  imperiousjv  than  any  other  recipients 
of  income.  The  payment  of  taxes  is  thus  a  vital  part  of  the 
distributive  process,  differing  from  the  payment  of  profits,  rent, 


578 


Taxation  and  Tax  Reform 


Three 
Classes  of 
Taxes  Dis- 
tinguished 


Conclusions 
as  to  Land 
and  Special 
Franchise 
Taxes 


wages,  and  interest,  only  in  that  the  government's  claim  is 
based  on  superior  force  rather  than  on  free  contract  guided  by- 
economic  motive.  This  does  not  mean  that  the  government 
may  not  be  properly  described  as  a  factor  in  production  and 
therefore  entitled  to  a  share  of  the  product.  Undoubtedly  its 
part  in  production  is  of  the  most  vital  importance.  It  merely 
means  that  as  this  part  is  not  based  on  contract,  there  is  no 
method  of  measuring  economically  the  amount  of  its  contri- 
bution. It  performs  the  indispensable  services  of  protecting 
life  and  property,  preserving  order,  administering  justice,  etc., 
and  takes  in  return  what  it  pleases,  or  rather  what  the  citizens 
in  a  democratic  country  please  to  permit  it. 

§  330.  From  the  point  of  view  of  their  influence  on  the  dis- 
tribution of  wealth  the  taxes  that  have  been  discussed  in  the 
preceding  pages  may  be  divided  roughly  into  three  different 
classes.  To  the  first  class  belong  land,  and  special  franchise 
taxes.  They  fall  upon  what  we  have  previously  styled  the 
"  funded  "  income  that  is  given  off  year  by  year  by  permanent 
and  durable  property,  like  land,  as  space  to  build  upon,  or  by 
special  and  exclusive  privileges,  like  franchises  granting  ex- 
clusive rights  to  lay  tracks  or  string  wires  along  the  public 
streets.  Normally  such  taxes  have  no  effect  on  distribution 
except  to  divert  to  the  use  of  the  government  a  part  of  the 
income  that  would  otherwise  have  gone  to  the  owners  of  the 
property  or  franchises  taxed.  Such  property  and  franchises 
are  already  being  made  to  yield  all  of  the  income  that  they 
can  afford  under  the  given  circumstances  and  the  imposition 
of  a  tax  in  no  wise  alters  these  circumstances.  Thus  the  en- 
tire tax  is  paid  out  of  the  funded  income. 

Since  the  value  of  sources  of  funded  incomes  is  the  annual 
net  income  capitalised  at  the  current  rate  of  interest,  a  sec- 
ondary effect  of  such  taxes  is  to  reduce  this  value  by  the  cap- 
italised value  of  the  tax.  If  the  tax  is  made  so  high  as  to 
take  the  entire  funded  income,  the  property  or  franchise  which 
gives  rise  to  it  ceases  to  have  any  value  as  an  investment.  In 
practice,  of  course,  taxes  usually  take  only  a  portion  of  the 
funded  income  and  merely  reduce  without  destroying  the  value 
of  the  lands  and  franchises  from  which  they  come.  From  this 
relation  between  the  rate  of  taxation  and  the  value  of  the 


Customs  and  Excise  Taxes  579 

property  taxed  two  principles  are  deduced  of  considerable 
practical  importance.  First,  new  or  higher  taxes  on  land  or 
special  franchises  unless  the  latter  are  appreciating  to  offset 
fully  such  taxes  involve  a  forced  reduction  in  the  value  of  such 
property.  Second,  after  such  taxes  have  been  imposed  long 
enough  to  permit  of  the  property  having  changed  hands  they 
become  virtually  burdenless  so  far  as  present  owners  are  con- 
cerned. 

The  second  class  of  taxes  include  those  on  commodities  Conclusions 
which  are  regularly  produced  and  consumed  and  upon  com-  toms  and 
petitive  businesses.  These  are  normally  shifted  from  those  Excise 
who  pay  them  to  those  who  consume  the  commodities  or  are 
served  by  the  businesses  taxed.  Their  effect  on  distribution  is 
complex,  but  in  general  they  may  be  said  to  figure  among  the 
conditions  to  which  economic  motives,  such  as  standards  of  liv- 
ing and  standards  of  saving,  adjust  themselves.  A  concrete 
illustration  will  help  to  make  the  effect  of  such  taxes  clearer. 
In  the  United  States  at  the  present  time  the  greater  part  of  the 
federal  revenue  is  derived  from  taxes  upon  commodities  which 
enter  into  the  consumption  of  the  ordinary  wage-earning 
family,  that  is,  on  sugar,  tobacco,  liquors,  cotton  and  woollen 
goods,  etc.  Suppose  that  these  taxes  add — and  this  is  a  mod- 
erate assumption — five  per  cent  to  the  expense  of  living  in  this 
country.  This  higher  cost  of  living  has  now  been  experienced 
for  many  years.  It  is  one  of  the  factors  with  which  immi- 
grants must  reckon  when  they  cross  the  ocean  in  pursuit  of 
higher  wages.  Is  it  not  probable  that  the  higher  cost  of  living 
has  acted  as  a  slight  check  upon  the  growth  of  population, 
partly  by  inducing  a  postponement  of  marriage  and  partly  by 
discouraging  immigration,  so  that  it  is  one  of  the  influences 
that  account  for  the  undoubted  fact  that  the  American  stand- 
ard of  living  and  scale  of  wages  is  higher  than  the  European 
by  more  than  enough  to  offset  the  higher  cost  of  living  in  the 
United  States?  Or,  to  put  the  case  negatively,  if  these  taxes 
were  all  repealed  and  in  their  place  a  federal  income  tax  were 
imposed  exempting  incomes  under  $i,ooo  and  at  a  rate  suf- 
ficient to  afford  all  needed  revenue,  is  it  probable  that  the  wage- 
earning  population  of  the  United  States  would  be  permanently 
better  off?     Would   not  accelerated  marriages  and  a  larger 


58o 


Taxation  and  Tax  Reform 


Conclusions 
as  to  Inheri- 
tance, In- 
come, and 
General 
Property 
Taxes 


Difficulties 
in  Way  of 
Tax  Reform 


tide  of  immigration  before  long  so  add  to  the  labour  supply 
that  wages  would  be  reduced  by  an  amount  corresponding  to 
the  lowered  cost  of  living?  Space  will  not  permit  an  exhaust- 
ive discussion  of  these  questions,  but  it  should  be  clear  that  a 
higher  cost  of  living,  which  is  deliberately  brought  about  and 
continued  year  after  year  through  a  country's  taxing  system, 
may  be  less  of  a  hardship  to  wage-earners  than  is  ordinarily 
supposed.  From  this  brief  discussion  of  this  second  class  of 
taxes  that  is  regularly  shifted  to  consumers,  two  principles 
may  be  inferred.  First,  new  taxes  on  commodities  that  are 
regularly  produced  and  consumed  or  on  competitive  businesses 
impose  a  burden  on  the  persons  who  consume  such  commod- 
ities or  who  are  served  by  such  businesses.  Second,  as  time 
goes  on  there  is  a  tendency  toward  readjustment  which  makes 
such  taxes  less  and  less  objectionable  the  older  they  become. 

The  third  class  of  taxes  include  those  on  inheritances  and 
those  on  incomes  and  general  property  when  accurately  as- 
sessed. These  taxes  cannot  be  shifted  and  since  they  do  not 
fall  upon  one  particular  kind  of  property  as  distinct  from  other 
kinds  neither  can  they  be  capitalised.  Their  effect  upon  dis- 
tribution is  thus  even  slighter  than  that  of  taxes  of  class  one, 
since  they  merely  take  from  the  incomes  of  different  persons 
without  altering  their  economic  relations  to  others  nor  even 
reducing  the  value  of  their  property  for  investment  purposes. 
As  was  brought  out  in  our  discussion  of  these  taxes,  those  on 
inheritances  are  least  objectionable  because  least  burdensome 
to  those  who  must  pay  them.  Those  on  income  are  admirable 
when  they  can  be  accurately  and  fairly  assessed,  but  very  un- 
fair if  evasions  are  common.  Finally  those  on  general  prop- 
erty fall  in  practice  so  far  short  of  the  ideal  of  taxing  all 
property  fairly  and  equally  that  they  are  not  at  all  to  be 
recommended. 

§  331.  The  reform  of  the  taxing  system  of  any  country  is 
complicated  by  the  fact  brought  out  in  the  last  section,  that 
as  regards  at  least  two  great  classes  of  taxes,  old  taxes  are  very 
much  less  objectionable  than  new  ones.  Since  reform  means 
usually  substituting  something  new  for  something  old  and 
established,  this  truth  is  well  calculated  to  discourage  reform- 
ing enthusiasm.     If  the  following  suggestions  as  to  changes 


Reform  of  Federal  Revenue  System     581 

that  would  be  desirable  in  the  taxing  system  of  the  United 
States  seem  conservative  it  is  partly  because  the  writer  is  con- 
vinced of  the  tendency  of  taxes  like  wine  to  ripen  and  mel- 
low with  age  and  partly  that  he  is,  perhaps  unduly,  impressed 
by  the  administrative  difficulties  in  the  way  of  some  of  the 
taxes  currently  advocated. 

The  first  fact  that  must  be  borne  in  mind  by  the  would-be  Tax  Prob- 
reformer  of  taxing  methods  in  the  United  States  is  the  relation  A^te^^or 
between  the  fiscal  requirements  and  the  taxing  powers  of  the  Cities 
different  branches  of  the  government.  The  federal  govern- 
ment has  limited  functions  to  perform  and  almost  unlimited 
taxing  powers.  For  it  the  problem  of  securing  adequate 
revenues  is  comparatively  simple.  The  state  governments  in 
turn  are  in  a  position  of  ease,  if  not  of  affluence.  The  functions 
,vhich  they  usually  assume  are  few  and  inexpensive,  while  their 
taxing  powers  are  but  slightly  abridged  by  the  federal  and 
state  constitutions.  The  situation  is  very  different  with  the 
local  governing  bodies  and  especially  the  cities.  Their  needs, 
as  already  shown,  call  for  twice  as  much  revenue  per  capita 
as  those  of  both  state  and  nation  together ;  and  at  the  same  time 
their  taxing  powers  arc  rigidly  limited  to  those  expressly  con- 
ferred by  state  legislation.  For  them  the  problem  of  making 
ends  meet  is  always  acute  and  the  chief  questions  about  anv 
new  tax  are:  will  the  courts  sustain  it  and  will  it  bring  in 
revenue. 

§  332.  In    the    opinion    of   the   writer   the    present    federal  Reform  of 
revenue  system  is  fairly  satisfactory,  except  at  two  points.    For  i^^^eQ^e 
reasons  that  have  already  been   explained   he  advocates  the  System 
gradual  substitution  of  a  simple  revenue  tariff  for  the  present 
cumbrous  protective  tariff.     This  change   might  be  effected 
without  any  loss  in  revenue  and  after  it  was  accomplished,  as 
English  experience  abundantly  proves,  the  revenue  machinery 
would   be   much   more   readily   responsive  to   changing   fiscal 
needs  than  it  is  at  present.    The  second  point  for  development 
is  in  connection  with  the  attempt  to  control  adequately  in  the 
public  interest  corporations  engaged  in  interstate  business.     It 
has  been  suggested  that  the  imposition  of  a  moderate  federal 
license  tax  on  such  corporations  would  help  to  make  them  more 
alive  to  their  obligations  to  the  public  and  the  plan  seems  to 


582 


Taxation  and  Tax  Reform 


Reform  of 

State 

Taxation 


General 
Property 
Tax 

should  be 
Abolished 


Inheritance 
Taxes 
should  be 
Extended 


merit  at  least  a  trial.  Such  a  tax  should  be  rather  a  means 
of  control  than  a  source  of  revenue,  however,  because  any 
considerable  revenue  that  may  be  derived  from  these  businesses 
is  imperatively  needed  by  the  state  and  local  governments. 

§  333-  Taxation  depends  so  largely  upon  local  conditions  for 
its  efficiency  that  suggestions  in  reference  to  desirable  state  and 
local  taxes  have  little  point  unless  it  is  clearly  indicated  what 
types  of  state  or  branches  of  local  government  are  referred  to. 
In  what  follows  the  writer  has  had  in  mind  the  conditions  and 
needs  of  the  more  advanced  industrial  states  and  of  the 
larger  cities  of  the  United  States.  Space  precludes  a  dis- 
cussion of  the  tax  problems  of  all  the  different  states,  and 
this  is  the  less  necessary  because  those  that  are  most  advanced 
are  already   in  the  situation   towards   which   the   others   are 


movmg. 


The  most  important  reform  that  is  needed  in  connection 
with  state  taxation  is  the  abolition  of  the  discredited  general 
property  tax  as  a  source  of  state  revenue.  The  part  of  this  tax 
which  applies  to  real  estate  should  be  remitted  not  because 
real  estate  is  too  heavily  taxed  but  because  all  revenue  from 
this  source  ought  to  be  assigned  to  the  local  governments  whose 
needs  so  far  exceed  their  taxing  powers.  The  reason  for 
abolishing  the  other  part  of  the  tax,  that  applying  to  personal 
property,  is  even  stronger.  Experience  has  demonstrated  con- 
clusively the  impossibility  of  assessing  such  property  fairly  in 
complex  industrial  communities.  Under  these  circumstances 
to  continue  the  attempt  to  tax  personal  property  is  to  bring 
the  whole  system  of  taxation  into  disrepute.  In  place  of  the 
general  property  tax  three  fruitful  sources  of  revenue  are  open 
to  the  state  governments — inheritance  taxes,  corporation  taxes, 
and  license  taxes. 

The  arguments  in  favour  of  taxing  inheritances  and  the  form 
which  such  taxation  may  properly  take  have  already  been  dis- 
cussed at  length.  The  Wisconsin  law  with  its  five  distinct 
classes  of  heirs  is  perhaps  more  complicated  than  is  desirable. 
It  would  probably  suit  American  conditions  better  to  dis- 
tinguish only  two  classes  of  heirs,  those  in  the  direct  line  and 
collateral  relatives  and  strangers,  or,  at  most  three,  those  in 
the  direct  line,  near  collateral  relatives,  and  more  remote  rela- 


Corporation  Taxes  583 

tives  and  strangers.  For  each  class  an  inheritance  of  a  cer- 
tain size  should  be  exempt  from  taxation,  but  there  is  no  reason 
for  making  the  exemption  as  large  as  is  often  done  ($10,000 
for  widows  in  Wisconsin,  for  example)  if  the  rate  of 
taxation  is  progressive.  The  range  of  progression  should  de- 
pend in  part  on  local  sentiment  but  it  is  believed  that  no  good 
reason  can  be  urged  against  going  at  least  as  far  as  the  Wis- 
consin law  and  making  the  highest  rate  applying  to  large 
inheritances  passing  to  remote  relatives  or  strangers  fifteen  per 
cent.  The  writer  would  even  advocate  the  higher  maximum, 
twenty  per  cent,  imposed  in  the  United  Kingdom  and  in  France. 
T"lie  successful  experience  of  New  York  with  its  moderate  in- 
heritance tax  indicates  that  large  revenues  may  be  derived 
from  this  source  without  imposing  any  excessive  burden  upon 
tax-payers. 

§  334.  Of  the  various  plans  that  have  been  tried  for  taxing  The  Best 
corporations  the  three  that  promise  greatest  success  in  the  corporation 
United  States  arc  by  means  of :    (i)   gross  receipts  taxes ;    (2)  Taxes 
capital  stock  and  bonded  debt  or  ordinary  franchise  taxes ;  and 
(3)  special  franchise  taxes.    Gross  receipts  taxes  are  not  gen- 
erally to  be  commended,  but  in  connection  with  one  form  of 
business,  that  of  insurance,  they  offer  the  easiest,  surest,  and 
perhaps  fairest  method  of  taxation  yet  devised.     For  corpora- 
tions generally  the  fairest  basis  of  taxation  is  believed,  for 
reasons  already  sufficiently  explained,  to  be  the  aggregate  value 
of  the  outstanding  shares  of  stock  and  the  bonds.     Together 
these  reflect  pretty  accurately  the  normal   earnings   of  cor- 
porations which  constitute  the  best  available  test  of  tax-paying 
ability.     Until  the  states  undertake  to  control  the  book-keeping 
cf  corporations  so  that  the  earnings  themselves  can  be  accu- 
rately assessed   the  stock-and-bond   index  of  earnings  is  un- 
doubtedly the  most  reliable  substitute.     Even  a  moderate  tax 
applying  to  all  of  the  corporations   doing  business  within  a 
state  in  proportion  to  the  amount  of  that  business  is  capable, 
as  the  experience  of  several  of  the  states  demonstrates,  of  bring- 
ing in  large  revenues.     The  special  franchise  tax  is  advocated 
as  a  supplement  to  the  ordinary  franchise  tax  for  corporations 
which  enjoy  special  and  exclusive  privileges.      Reasons  have 
already  been  given  for  favouring  the  New  York  plan  by  which 


584 


Taxation  and  Tax  Reform 


The  High 
License 
System 
should  be 
Extended. 


The  Real 
Estate  Tax 
should  be 
Separated 
into  Land 
and  Build- 
ing Taxes 


special  franchises  are  assessed  as  real  estate  and  the  greater 
part  of  the  proceeds  of  the  tax  upon  them  is  enjoyed  by  the 
local  governing  bodies. 

§  335-  ^P  to  the  present  time  the  high  license  system  has 
been  appHed  only  to  the  hquor  business.  The  moral  advan- 
tages of  confining  the  selling  of  liquor  to  fewer  establishments 
in  more  responsible  hands  has  been  the  chief  argument  urged  in 
its  favour.  Experience  with  it  in  operation  has  made  prom- 
inent certain  economic  advantages  which  suggest  the  desir- 
ability of  applying  it  to  many  other  branches  of  trade.  The  sell- 
ing and  distribution  of  milk,  ice,  groceries,  provisions,  etc., 
admit  of  even  larger  savings  through  the  concentration  of  man- 
agement brought  about  by  the  high  license  system  than  the  sell- 
ing and  distribution  of  liquors.  These  businesses  oiler  a  large 
and  practically  untouched  field  for  the  tax  gatherer  and  just  as 
the  payment  of  high  licenses  has  served  neither  to  make  the 
saloon  business  unprofitable  nor  to  compel  the  consumer  to 
pay  much  more  for  his  beer  and  whisky  so  it  is  believed  that 
the  payment  of  high  license  by  milk  dealers,  ice  companies, 
grocers,  butchers,  etc.,  would  serve  merely  to  concentrate  these 
businesses  into  fewer  and  more  competent  hands  without 
appreciably  raising  the  prices  of  the  commodities  sold.  By 
extending  its  license  system  to  include  these  and  other  busi- 
nesses every  state  in  wdiich  large  cities  are  found  could  put 
itself  in  a  position  to  dispense  with  the  returns  from  the  general 
property  tax. 

§  33^-  '^^^Q  local  governing  bodies  must  doubtless  continue 
as  at  present  to  derive  the  greater  part  of  their  revenue  from 
the  taxation  of  real  estate.  In  so  doing  however  they  ought 
to  difi^erentiate  the  land  or  ground  tax  from  the  building  tax 
and  allow  these  taxes  to  go  different  ways.  With  the  abolition 
of  the  tax  on  personal  property  the  general  property  tax  loses 
its  justification  and  what  is  left  of  it  must  be  defended  upon  in- 
dependent grounds.  A  moderate  building  tax  may  be  defended 
because  it  selects  a  reasonable  criterion  of  tax  paying  ability, 
that  is,  the  sort  of  house  or  place  of  business  a  person  occupies, 
and  bases  its  exaction  upon  that ;  but  it  should  not  be  confused 
with  the  land  tax.  The  latter,  if  of  old  standing,  finds  sufficient 
justification  in  the  fact  that  those  who  pay  it  no  longer  feel  it 


Extension  of  the  Land  Tax  585 

as  a  burden  and  to  relax  it  would  be  making  them  a  present 
of  something  they  never  expected  to  receive.  But  this  justi- 
fication of  an  old  land  tax  becomes  in  turn  a  ground  of  con- 
demnation for  a  new  or  higher  land  tax — the  rent  of  land  not 
having  changed.  Such  a  tax  involves  the  confiscation  of 
property. 

This  does  not  mean,  however,  that  a  city  or  country  must  Extension 
'content  itself  with  an  unvarying  land  or  ground  tax  year  after  ^ax^° 
year.  In  progressive  communities  there  is  a  tendency  for  the 
rent  and  value  of  land  gradually  to  increase  and  this  irrespec- 
tive of  any  action  or  merit  on  the  part  of  the  landowners.  A 
part  of  this  increase  may  properly  be  claimed  by  the  local 
government  on  the  ground  that  it  has  been  due  to  the  general 
progress  of  the  place  and  that  what  is  left  will  more  than  com- 
pensate the  owner  for  any  trouble  he  may  have  had  in  con- 
nection with  it.  How  this  enforced  sharing  with  the  com- 
munity of  the  benefits  of  progress  is  to  be  imposed  upon  land- 
owners is  a  difificult  question,  but  several  ways  have  been  sug- 
gested and  if  the  economic  grounds  for  the  plan  are  conceded 
there  seems  no  good  reason  why  the  needed  administrative 
machinery  may  not  be  created. 

In  addition  to  buildings  and  land,  the  special  franchises  or  Special 
monopoly  earnings  of  public  service  corporations  are  a  proper  ^g  ^  Source 
object  of  local  taxation  and  the  plan  adopted  by  New  York  of  Revenue 
State  of  defining  such  special  franchises  as  real  estate  for  pur- 
poses of  taxation  has  already  been  advocated.  No  locality  is 
warranted,  however,  in  expecting  to  derive  more  than  moderate 
returns  from  the  taxation  of  special  franchises.  That  such 
franchises  have  value  at  all  indicates  that  the  corporations  en- 
joying them  are  taking  advantage  of  their  monopoly  position 
to  charge  more  for  the  indispensable  services  that  they  render 
than  these  services  cost.  It  is  the  duty  of  the  government, 
instead  of  permitting  the  value  of  special  franchises  to  increase, 
to  insist  on  lower  charges  even  at  the  sacrifice  of  revenue  to 
itself.  Cheap  water,  cneap  gas  and  electricity,  and  cheap 
transportation  facilities  are  so  important  that  they  compare 
with  the  services  which  the  municipality  itself  renders.  It 
would  be  robbing  Peter  onlv  partly  to  pay  Paul  to  allow  the 
value  of  special  franchises  to  appreciate  for  tlie  sake  of  the 


586 


Taxation  and  Tax  Reform 


License 
Taxes 


Conclusions 
as  to 

Municipal 
Taxation 


Changes 
Advocated 
Con- 
servative 


General 
Conclusion 


small  proportion  of  the  increased  monopoly  income  that  is 
diverted  by  taxation  to  the  general  use.  Even  if  the  govern- 
ment received  all  of  the  increase  in  earnings  it  would  still  be 
doubtful  policy  to  permit  needlessly  iiigh  charges  to  continue 
in  force. 

A  fourth  source  of  municipal  revenue  is  from  license  taxes 
justified  on  grounds  explained  in  the  last  section.  Already  it 
is  customary  in  several  states  to  share  the  proceeds  of  liquor 
license  taxes  with  the  local  governments  within  whose  juris- 
dictions the  licenses  are  held.  There  is  every  reason  why 
this  policy  should  be  made  general  if  the  high  license  system 
were  extended  as  has  been  advocated.  It  would  then  prove 
an  important  municipal  as  well  as  state  resource. 

These  four  taxes  supplemented  by  the  other  sources  of  local 
revenues  described  in  the  last  chapter  would,  it  is  believed,  fully 
meet  the  legitimate  requirements  of  local  governments  in  the 
United  States. 

§  337.  In  comparison  with  the  taxes  now  in  force  in  the 
United  States  the  system  of  taxation  which  would  result  if 
the  various  changes  that  have  been  suggested  were  adopted 
would  have  at  least  the  advantage  of  simplicity.  No  tax  has 
been  approved  that  could  not  be  easily  and  accurately  assessed 
and  collected.  Nearly  as  important  as  this  administrative  merit 
is  the  fact  that  such  large  use  is  proposed  of  what  we  have 
called  "  burdenless  "  taxes.  A^Hien  the  business  community 
was  thoroughly  adjusted  to  the  system  it  is  believed  that  not 
only  the  land  and  special  franchise  taxes  but  also  the  inheritance 
and  license  taxes  would  impose  but  little  real  burden  upon  those 
who  paid  them.  As  one  final  merit  it  may  be  claimed  that  in 
assigning  an  important  role  to  license  taxes  the  system  would 
serve  to  foster  economical  production  rather  than  to  stifle 
enterprise  as  business  taxes  are  only  too  apt  to  do. 

The  proposed  changes  will  seem  altogether  inadequate  to 
advocates  of  the  single  tax  or  other  radical  plans  of  tax  reform. 
To  such  persons  no  system  which  fully  respects  vested  interests 
can  be  satisfactory  for  it  is  some  of  those  very  interests  that 
it  is  desired  to  reform  out  of  existence.  "  Single  taxers,"  for 
example,  persuaded  that  the  private  enjoyment  of  the  income 
called  land-rent  is  unjust,  propose  to  secure  this  income  for 


General  Conclusion  587 

the  government  by  means  of  a  tax.  But  by  so  doing  they 
would  practically  confiscate  the  property  of  landowners,  since 
the  principal  incentive  to  the  private  ownership  of  land  is  en- 
joyment of  the  income  which  land  affords.  In  the  same  way 
some  socialists  have  proposed  to  realise  their  more  radical 
programme  of  substituting  public  for  private  ownership  of  all 
of  the  instruments  of  production,  by  taxing  land  and  capital  so 
heavily  that  private  ownership  will  cease  tO'  confer  any  benefits 
upon  the  property  owner.  Much  as  the  author  both  wishes 
and  hopes  to  see  a  more  equal  distribution  of  property  than 
now  prevails,  he  cannot  persuade  himself  that  good  can  result 
from  using  the  machinery  of  taxation  to  confiscate  property 
which  the  law  has  so  long  protected.  As  time  goes  on  it  will 
doubtless  be  desirable  gradually  to  extend  the  domain  of  public 
property  and  in  so  doing  to  encroach  upon  the  field  of  private 
ownership.  This  may  be  accomplished  either  by  an  exercise  of 
the  right  of  eminent  domain  under  which  property  required  for 
a  public  purpose  may  be  condemned,  full  compensation  being 
paid  to  the  previous  owner  for  the  loss  which  he  suffers,  or  by 
asserting  the  right  of  the  State  to  the  exclusive  use  of  certain 
forms  of  property  or  to  the  exclusive  pursuit  of  certain  indus- 
tries. To  attempt  to  accomplish  it,  however,  by  seizing  with- 
out compensation  one  after  another  of  the  forms  of  property 
that  it  is  desired  to  withdraw  from  private  ownership,  even  if 
this  be  done  under  the  guise  of  taxation,  is  to  substitute  spolia- 
tion and  robbery  for  law  and  justice.  The  mistakes  of  the  past 
in  permitting  the  undue  extension  of  the  field  of  private 
property  cannot  be  corrected  by  injustice  in  the  present.  What 
is  rather  to  be  insisted  upon  is  that  the  lessons  of  the  past  shall 
be  taken  to  heart  by  those  charged  with  the  administration  of 
public  affairs  so  that  similar  mistakes  shall  not  be  repeated. 

REFERENCES  FOR  COLLATERAL  READLXG 

In  addition  to  the  general  works  referred  to  at  the  end  of  the  last 
chapter  the  following  special  treatises  on  different  phases  of  taxa- 
tion in  the  United  States  may  be  consulted  with  profit:  *Ji<dson, 
Treatise  on  the  Power  of  Taxation,  State  and  Federal;  *  Patten,  K 
Rational  System  of  Taxation;  *Howe,  Taxation  in  the  United  States 
under  the  Internal  Revenue  System;  Walker,  Double  Taxation  iu 
the  United  States;  Ely,   Taxation  in   American  States  and  Cities; 


588 


Taxation  and  Tax  Reform 


Durand,  State  Finance  Statistics,  1890  and  1895  (in  New  York  State 
Library  Bulletins  for  1897);  IVori/nngiofi,  Historical  Sketch  of  the 
Finances  of  Pennsylvania;  *East7nan,  Taxation  for  State  Purposes 
in  Pennsylvania;  Robinson,  A  History  of  Taxation  in  New  Hamp- 
shire; Judson,  Taxation  in  Missouri;  Le  Rossigtiol,  Taxation  in 
Colorado;  Kinsman,  The  Income  Tax  in  the  Commonwealths  of  the 
United  States;  Ple/in,  The  General  Property  Tax  in  California; 
Carver,  The  Ohio  Tax  Inquisitor  Law;  West,  The  Inheritance  Tax; 
Rosewater,  Special  Assessments;  Whittett,  Taxation  of  Corporations 
in  New  York,  Massachusetts,  Pennsylvania,  and  New  Jersey  (in  New 
York  State  Library  Bulletins  for  1901);  *Durand,  Finances  of  New 
York  City;  *  Hollander,  Financial  History  of  Baltimore;  Huebner 
and  Millis,  The  Inheritance  Tax  in  the  American  Commonwealths 
(articles  in  Quarterly  Journal  of  Economics  for  August,  1904,  and 
February,  1905);  Urdahl,  The  Fee  System  in  the  United  States; 
Chapman,  SiiaXe  Tax  Commissions  in  the  United  States;  *Bullock, 
Direct  Taxes  and  the  Federal  Constitution  (articles  in  Yale  Review 
for  February,  May,  and  August,  1901);  *Hill,  The  English  Income 
Tax, 


CHAPTER  XXIX 

ECONOMIC   PROGRESS 

§  338.  Economic  progress  is  improvement  in  general  well-  The 
being  due  either  to  increased  command  over  economic  goods  Economic 
or  to  reduced  costs  of  production.  It  may  show  itself  in  in-  Progress 
creased  earnings  for  the  labouring  masses,  in  shortened  hours 
of  labour,  or  in  an  increased  adaptation  of  work  to  the  tastes 
and  capacities  of  workmen.  Definite  as  these  criteria  of  prog- 
ress appear  to  be,  it  is  unfortunately  true  that  there  are  no 
means  of  comparing  them  accurately  from  generation  to  gen- 
eration. Until  recently  few  records  were  kept  of  the  com- 
modities which  families  in  different  circumstances  were  in  the 
habit  of  consuming.  Even  those  which  are  now  preserved 
will  be  puzzling  in  many  of  their  details  to  future  economists 
because  the  goods  consumed  will  have  changed  in  kind  and 
quality  as  well  as  in  quantity.  The  impossibility  of  making 
exact  allowance  for  such  changes  opposes  a  permanent  bar- 
rier to  accurate  comparisons  between  the  standards  of  living 
of  different  periods.  Similar  difficulties  are  encountered  in 
trying  to  gauge  changes  in  the  sacrifices  involved  in  produc- 
tion. If  it  can  be  shown  that  the  length  of  the  working  day 
has  been  shortened,  it  may  yet  be  claimed  by  the  unbelieving 
that  the  intensity  of  labour  has  increased  correspondingly,  and 
there  is  no  certain  way  of  deciding  whether  or  not  this  has 
been  the  case.  Under  these  circumstances  the  economist  must 
content  himself  with  comparing  those  objective  indications  of 
well-being,  such  as  the  rates  of  wages  earned  by  workmen  of 
different  grades,  the  length  of  the  working  day,  etc.,  which 
admit  of  measurement  and  appeal  to  the  judgment  of  intelli- 
gent observers  to  determine  whether  these  and  other  changes 
have  really  added  to  human  welfare. 

Even  so  simple  a  question  as  that  whether  average  money 
wages  have  increased  or  diminished  can  be  answered  only  on 

5S9 


590 


Economic  Proeress 


Changes 
in  Wages 
and  Hours 
of  Labour 


Progress 
in  Con- 
sumption 


the  basis  of  elaborate  statistical  investigations.  One  of  the 
latest  of  such  inquiries,  conducted  by  the  English  statistician, 
Mr.  Bowley,  led  to  the  conclusion  that  in  the  United  Kingdom 
if  the  average  wages  paid  in  different  employments  from  1890 
to  1899  be  represented  as  100,  the  average  wages  paid  at  pre- 
vious periods  should  be  represented  as  90  from  1880  to  1890, 
95  from  1870  to  1880,  75  from  i860  to  1870,  65  from  1850  to 
i860,  60  from  1830  to  1850,  65  from  1820  to  1830,  65  to  70 
from  1810  to  1820,  and  55  to  65  from  1800  to  1810.  This  re- 
sult, although  confirmed  as  regards  some  of  its  items  by  in- 
vestigations made  by  Sir  Robert  Giffen,  Mr.  Leone  Levi,  and 
other  English  statisticians,  must  be  accepted  as  subject  to  a 
large  and  indeterminate  margin  of  error.  Perhaps  all  that 
should  be  afiirmed  on  the  basis  of  it  is  that  the  trend  of 
wages  during  the  century  was  distinctly  upwards  and  that  the 
rise  for  the  whole  period  was  not  less  than  50  per  cent.  As 
regards  hours  of  labour  there  is  equally  clear  evidence  of  im- 
provement. Hours  generally  appear  to  have  been  shortened 
about  two  a  day  {e.  g.,  from  10  to  14  in  dift'erent  employments 
to  from  8  to  12).  Statistical  evidence  in  reference  to  changes 
in  wages  and  hours  of  employment  in  the  United  States  is  less 
ample  than  for  the  United  Kingdom,  Without  entering  into 
details  it  may  be  affirmed  that  in  this  country  also  the  trend 
appears  to  have  been  upwards  as  regards  wages  and  down- 
wards as  regards  hours  during  the  last  century,  but  that  the 
improvement  was  less  marked  than  in  the  United  Kingdom, 
partly,  doubtless,  because  the  United  States  started  at  a 
higher  level  and  one  of  the  tendencies  of  the  century  was  to- 
wards equalising  conditions  in  the  two  countries. 

§  339.  Another  method  of  gauging  the  extent  and  direc- 
tion of  economic  progress  is  to  review  the  changes  that  have 
occurred  in  the  fields  of  consumption,  production,  and  distribu- 
tion to  determine  whether  they  have  been,  on  the  whole, 
favourable.  In  Chapter  IV.  we  considered  the  contributions 
which  changes  in  wants  and  habits  of  consumption  may  make 
to  general  well-being.  Progress  in  this  field  depends  upon 
increasing  attention  to  the  laws  of  variety,  of  harmony,  and  of 
least  social  cost,  upon  greater  economy  in  consumption,  and 
upon  the  substitution  for  narrow  and  selfish  luxury  of  more 


Progress  in  Consumption  59^ 

social  uses  of  wealth.     As  regards  each  one  of  these  aspects 

of  consumption  progress  may  be  discerned. 

Improvements    in   transportation    facihties    have    helped    to  Increased 
.      ,  ,        ,  ,     1  ■  1  •     >•         •  ^-  1-1     Variety 

break  down  local  habits  and  prejudices  in  consumption,  while 

at  the  same  time  they  have  served  to  bring  an  ever  greater 

variety  of  products  to  local  markets.     As  a  consequence  the 

wage-earner  of  to-day  may  enjoy  as  great  a  variety  of  goods 

as  did  people  of  wealth  a  century  ago.     That  this  increased 

variety  of  consumption  has  added  to  general  well-being  can 

scarcely  be  questioned. 

Progress  in  the  direction  of  greater  harmony  in  consump-  Increased 
tion  is  less  clearly  in  evidence,  partly  because  the  increasing  ^^'"'^"y 
variety  of  goods  open  to  consumers  has  itself  tended  to  cause 
confusion.  Within  recent  years,  however,  a  great  deal  of  at- 
tention has  been  given  to  the  cultivation  of  taste  among  the 
masses  and  there  is  reason  to  think  that  these  efforts  are  be- 
ginning to  bear  fruit.  In  this  department  there  is  still,  never- 
theless, room  for  great  improvement.  If  appreciation  of 
beauty  of  form  and  colour  could  be  made  general,  the  produc- 
tion of  beautiful  objects  for  ordinary  domestic  use  might  in  the 
future  be  effected  as  cheaply  as  is  that  of  ugly  objects  now. 
The  result  would  be  a  material  addition  to  the  sense  of  well- 
being  and  contentment  of  all  classes. 

Another  result  of  higher  standards  of  taste  on  the  part  of  Reduced 
consumers  would  be  increased  scope  for  congenial  employ- 
ments for  producers.  Thus  the  law  of  least  social  cost  would 
come  into  play,  to  add  to  the  advantages  resulting  from  the 
change.  Perhaps  the  clearest  indication  that  progress  to- 
wards lessening  the  costs  of  production  is  being  made  in  the 
United  States  is  the  gradual  abatement  of  the  quite  irrational 
passion  for  wealth  accumulation  that  has  been  noted  by  foreign 
observers  as  an  American  characteristic,  and  a  more  general 
appreciation  of  the  fact  that  what  a  man  does  for  his  living 
has  at  least  as  great  an  influence  on  his  happiness  as  the 
amount  he  earns. 

The   indications   of  progress   towards   greater   economv   in  Increased 

.^,.,         C--  1         u  i'  Economy 

consumption  are  unmistakable,  bcience  has  begun  to  con- 
cern itself  seriously  with  the  problem  of  determining  what 
kinds  of  goods  contribute  most  largely,  in  jiroportion  to  their 


592 


Economic  Progress 


Consumers' 
Leagues 


Progress 

in 

Production 


cosf,  to  the  satisfaction  of  man's  physical  wants,  and  the  results 
already  achieved  are  noteworthy.  At  the  same  time  success- 
ful efitorts  have  been  made  to  reduce  the  losses  due  to  fire  and 
flood  and  to  repress  those  forms  of  consumption  that  are 
socially  injurious  rather  than  beneficial.  Even  clearer  has 
been  the  progress  made  towards  substituting  social  for  merely 
selfish  ways  of  using  wealth.  The  rich  are  undoubtedly  grow- 
ing richer  with  the  progress  of  time, but  they  are  also  becoming 
more  mindful  of  their  social  obligations.  Public  opinion  no 
longer  finds  an  excuse  for  wanton  extravagance  in  the  "  make- 
work  "  argument  and  is  increasingly  appreciative  of  rich  men 
who  live  simple  and  unostentatious  lives  in  order  that  they 
may  have  the  more  to  spend  for  public  purposes.  No  exact 
statistics  showing  the  increase  in  the  United  States  of  gifts 
for  charitable  and  educational  objects  are  available,  but  there  is 
good  reason  to  believe  that  they  have  grown  at  a  much  more 
rapid  rate  than  private  fortunes. 

Another  indication  of  progress  in  the  field  of  consumption 
in  the  United  States  is  the  organisation  of  Consumers'  Leagues 
in  the  large  cities  of  the  country.  By  means  of  white  lists, 
Consumers'  League  labels,  and  other  devices,  these  societies 
enable  their  members  and  other  interested  persons  to  discrim- 
inate in  their  purchases  between  the  products  of  fair  and 
humane  employers  and  those  of  their  less  scrupulous  competi- 
tors. The  existence  of  these  societies  is  itself  a  hopeful  sign, 
since  it  evinces  a  growing  consciousness  on  the  part  of  con- 
sumers of  their  responsibility  for  the  conditions  of  produc- 
tion. By  directing  consumption  along  socially  defensible  lines, 
they  have  contributed  their  share  towards  the  progress  in  con- 
sumption that  has  undoubtedly  been  achieved. 

§  340.  The  advance  that  has  been  made  in  the  field  of  pro- 
duction is  so  familiar  as  to  require  only  the  briefest  considera- 
tion. Invention  and  discovery  have  scored  triumph  after  tri- 
umph since  the  first  application  of  steam  power  to  industry, 
and  in  every  branch  of  business  the  productiveness  of  labour 
has  been  largely  increased.  Other  causes  contributing  to 
this  result  have  been  the  opening  up  to  exploitation  of  new 
lands  and  new  sources  of  mineral  wealth,  the  growth  of  capi- 
tal, improvements   in   forms   of   industrial   organisation,   and 


Progress  in  Distribution  593 

the   development  of  more   capable  and   intelligent   men   and 
women. 

When  the  enormous  multiplication  of  goods  that  has  been 
made  possible  by  these  changes  is  considered,  it  may  well  seem 
surprising  that  the  condition  of  wage-earners  has  not  been 
improved  even  more  than  has  been  the  case.  To  account  for 
this  fact  we  must  consider  the  progress  that  has  been  made  in 
the  field  of  distribution. 

§  341.  Progress  in  distribution  results  from  changes  which  Progress 
increase  the  command  over  goods  enjoyed  by  the  masses.  To  [dbut^ion 
measure  it  the  earning  power  of  the  bare-handed,  unskilled 
workman  of  one  period  must  be  compared  with  that  of  the 
same  workman  of  another,  allowance  being  made  for  any 
change  in  the  proportion  which  unskilled  workmen  bear  to  the 
whole  population.  The  statistics  already  cited  indicate  that 
wages  have  risen  substantially,  and  yet  the  margin  between  the 
necessary  expenses  of  the  ordinary  labouring  family  and  its 
earnings  is  still  painfully  narrow,  even  in  the  United  States, 
the  country  of  high  wages. 

The  reasons  why  the  average  workman  still  receives  such  a  Reasons 
small  return  have  already  been  suggested.     In  the  first  place,  persistence 
notwithstanding  the  substantial  increase  in  the  productiveness  of  Low 
of  industry,  an  equal  per  capita  distribution  would  still  fail  to      ^^^^ 
provide    very    amply    for   the    satisfaction    of    each    person's 
wants.    The  number  of  persons  of  property  and  high-earning 
capacity  is  still  small  in  comparison  with  the  number  of  the 
wage-earning  population,  and  the  surplus  incomes  of  the  for- 
mer, equally  distributed,  would  not  add  very  greatly  to  the 
present  earnings  of  the  latter.     A  second  point  is  that  the 
increased  productiveness  of  industry  has  been  due  in  large 
measure  to  improvements  in  the  capital   goods  which  assist 
production.     The  immediate  tendency  of  such  improvements 
is  to  add  to  the  earning  power  of  capital,  rather  than  to  that 
of  labour.     This  has  been  neutralised  by  a  remarkable  growth 
in  the  amount  of  capital,  and  the  rate  of  interest  must  have 
fallen  to  a  very  low  level  had  not  population  also  increased  at  a 
remarkable  rate.    The  net  result  of  these  changes  has  been  a 
lower  rate  of  interest  on  an  immensely  larger  capital  fund  and 
a   somewhat   higher   rate   of   wages   for   a   greatly   increased 


594 


Economic  Progress 


influence 
of  the 
Growth  of 
Population 


labouring  population.  A  third  point  concerns  the  trend  of 
rent.  The  opening  of  new  lands  to  exploitation  must  have 
raised  materially  the  margin  of  cultivation  and  thus  reduced 
the  rent  fund,  had  it  not  been  paralleled  by  the  remarkable 
growth  in  population  just  referred  to.  The  older  countries  of 
Europe  have  poured  out  millions  upon  millions  of  colonists 
to  the  new  lands,  but  without,  except  in  the  single  case  of  Ire- 
land, reducing  their  own  populations  in  the  process.  In  conse- 
quence, the  raising  of  the  margin  of  cultivation  in  European 
countries  has  been  slight,  while  the  rapid  settlement  of  new 
countries  has  caused  the  better  lands  and  natural  resources 
there  to  command  high  rents.  Thus  the  rent  fund,  like  the 
interest  fund,  has  increased  enormously  in  the  aggregate,  not- 
withstanding the  fact  that  the  margin  from  which  rents  are  cal- 
culated has  risen  somewhat.  A  fourth  and  last  point  concerns 
the  deductions  from  the  social  income  made  because  of  the 
monopoly  powers  of  certain  entrepreneurs.  There  can  be  no 
question  that  a  considerable  share  of  the  new  wealth  due  to 
economic  progress  is  enjoyed  by  those  controlling  the  various 
forms  of  monopoly  analysed  in  earlier  chapters.  If  these  mo- 
nopoly incomes  could  be  diffused  either  by  more  general  com- 
petition or  by  the  legal  regulation  of  prices,  the  earnings  of 
workmen  might  be  higher. 

A  superficial  consideration  of  the  above  tendencies  might 
lead  to  the  conclusion  that  the  growth  of  population  was  the 
chief  cause  of  the  persistence  of  the  low  earning  power  of 
workmen.  Undoubtedly,  had  population  increased  less  while 
capital  increased  at  the  same  rate  and  new  lands  and  natural 
resources  were  opened  on  the  same  scale,  the  economic  position 
of  the  average  man  would  have  been  much  improved,  but 
we  are  not  justified  in  assuming  any  such  possibility.  As 
a  matter  of  fact,  the  high  rate  of  interest,  which  has  been 
a  chief  influence  in  encouraging  and  making  possible  the 
remarkable  increase  in  capital,  has  itself  been  maintained 
in  the  face  of  such  increase,  at  least  in  part,  because  of 
the  parallel  growth  of  population.  The  growth  of  popula- 
tion has  been,  also,  a  principal  incentive  to  the  discovery 
and  exploitation  of  new  lands  and  natural  resources.  It  has 
thus  stood  in  a  causal  relation  both  to  the  increase  of  capital 


Justification  of  Profits  595 

and  the  settlement  of  new  countries,  and  speculation  as  to 
whether  a  less  rapid  multiplication  would  have  been  on  the 
whole  advantageous  to  the  average  man,  is  idle. 

Quite  a  different  question  is  that  as  to  whether  such  large 
deductions  from  the  products  of  industry  for  the  payment  of 
competitive  and  monopoly  profits,  of  rent,  and  of  interest  are 
necessary.  It  is  at  this  point  that  radical  reformers  take  issue 
•with  conservative  economists.  In  a  previous  chapter  we  consid- 
ered plans  for  securing  for  the  common  benefit  rent  and  inter- 
est, and  decided  that  they  were  impracticable.  We  must  now 
examine  these  shares  in  a  more  positive  way,  to  determine  in 
what  relation  their  payment  stands  to  the  motives  and  forces 
that  cause  economic  progress. 

§  342.  Generally  speaking,  competitive  profits  are  fairly  Economic 
earned  by  those  who  receive  them.  They  are  the  incentive  tion  o£^^" 
which  industrial  society  offers  to  entrepreneurs  who  will  im-  Competi- 
prove  upon  current  methods  of  production.  To  secure  them 
entrepreneurs  compete  actively  to  lower  their  expenses  of 
production  so  that  they  may  undersell  each  other,  and  the 
whole  community  is  benefited  by  the  resulting  reductions  in 
the  costs  of  production.  At  times,  however,  competitive 
profits  are  obtained  in  ways  that  injure  rather  than  benefit 
society.  Unscrupulous  employers  may  take  advantage  of  the 
ignorance  or  necessities  of  their  workmen  to  depress  their 
wages  below  the  level  which  permits  them  to  maintain  their 
industrial  efficiency.  Cheap  commodities  obtained  by  this 
means  are  all  too  dear  if  the  best  interests  of  producers  and 
consumers  alike  be  considered.  Other  entrepreneurs  may 
undersell  their  competitors  by  adulterating  their  products. 
Still  others  may  sell  their  goods  for  less  than  their  production 
has  actually  cost,  and  by  declaring  themselves  insolvent  shift 
the  resulting  loss  to  their  creditors.  These  and  other  forms  of 
competition  give  rise  to  competitive  profits  for  which  industrial 
society  receives  no  adequate  return,  and  no  effort  should  be 
spared  to  render  them  impossible. 

Even  more  important  as  sources  of  large  incomes  to  par-  Monopoly 
ticular  entrepreneurs  are  monopoly  profits.     These,  too,  are  Profits 
usually  secured,  at  least  at  the  outset,  in  consequence  of  im- 
provements that  have  been  made  in  the  methods  of  production, 


59^  Economic  Progress 

but  they  must  always  be  viewed  with  some  suspicion,  because 
they  are  Hkely  to  continue  long  after  the  improvements  have 
been  made  and  adequately  paid  for.  If  the  monopolies  which 
give  rise  to  them  are  natural,  that  is,  if  they  result  from  the 
fact  that  concentrated  management  and  operation  are  econom- 
ical, sufficient  monopoly  profit  to  induce  entrepreneurs  to 
organise  such  industries  on  a  large  scale  must  be  left  to  them 
if  the  benefits  of  monopoly  are  to  be  enjoyed.  The  govern- 
ment may  properly  interfere,  however,  in  ways  that  have  been 
discussed  in  earlier  chapters,  to  prevent  excessive  monopoly 
profits.  If  the  monopolies  are  the  result  of  legal  privileges, 
control  over  their  profits  should  be  exercised  as  a  matter  of 
course  by  the  government  which  grants  such  privileges.  If 
they  are  due  to  obstacles  to  the  free  play  of  competition,  or  to 
unfair  forms  of  competition,  the  duty  of  the  state  to  remove 
such  obstacles  and  put  a  stop  to  such  unfair  practices  is  clear. 
Unless  the  government  is  zealous  in  the  exercise  of  its  control 
over  monopolies,  great  inequalities  in  income  are  sure  to  result 
without  any  commensurate  benefit  to  the  whole  community. 
Rent  and  |  243.   The  payment  of  rent  and  interest  for  the  use  of  pieces 

of  land  and  capital  goods  is  a  natural  consequence  of  the  insti- 
tution of  private  property  in  the  factors  of  production.  That 
this  institution  has  played  an  important  part  in  stimulating 
economic  progress  in  the  past  can  hardly  be  questioned.  It 
has  served  as  a  constant  incentive  to  the  industry  and  thrift 
without  which  no  advance  could  have  been  made.  The  prin- 
cipal economic  motive  of  the  average  man  is  to  provide  for  the 
comfort  and  happiness  of  his  family.  To  accomplish  this 
object  he  is  willing  to  work  laboriously  and  to  set  aside  a  part 
of  his  surplus  income  as  a  provision  for  the  time  when  he  can 
work  no  more,  or  as  a  means  to  giving  his  children  a  better 
start  in  life  than  he  has  himself  enjoyed.  But  a  necessary 
condition  to  the  accumulation  of  wealth  for  future  use  is  that 
the  law  shall  protect  individuals  in  the  owmership  and  control 
over  their  property.  Where  such  protection  is  lacking  little 
wealth  will  be  accumulated,  and  of  that  little  a  large  part  will 
necessarily  be  expended  in  safeguarding  what  is  left.  On  the 
other  hand,  the  more  certain  the  legal  protection  afiforded  to 
property-owners  the  larger  will  their  accumulations  become 


Justification  of  Rent  and  Interest        597 

and  the  more  ample  will  be  society's  resulting  equipment  in 
capital  goods. 

The  payment  of  rent  and  interest  has  been  explained  as  a  Justifi- 
transfer  to  property-owners  of  the  shares  of  wealth  which  have  ^^^^^  ^^ 
been  produced  through  the  use  of  their  property.  It  cannot 
be  looked  upon  as  a  hardship  to  workmen,  since  it  involves  no 
reduction  in  the  share  of  wealth  economically  ascribable  to 
their  labour.  But  it  has  been  objected  that  the  payment  of  rent 
to  private  landowners  is  unfair  and  uneconomical  because  the 
qualities  in  the  land  for  which  it  is  paid  are  either  natural 
or  due  to  social  changes  for  which  landowners  deserve  no 
credit.  The  reply  to  this  contention  is  that  while  rent  does 
frequently,  if  not  usually,  arise  from  these  causes,  it  is  still 
true  that  private  property  in  land  is  the  surest  means  of 
encouraging  the  best  use  of  land.  To  the  extent  that  rents  may 
be  diverted  to  the  service  of  the  whole  community,  without 
injustice  to  present  landowners  and  without  interference  with 
the  best  uses  of  land,  such  diversion  should  be  effected  by  means 
of  taxes.  But  this  as  has  already  been  pointed  out  offers  onlv  a 
limited  field  for  reform.* 

The  payment  of  interest  is  the  incentive  which  industrial  Justifica- 
society  offers  to  those  who  will  save  and  invest  their  incomes,  interest 
just  as  wages  are  the  premiums  ofTered  to  those  who  will 
work.  So  long  as  men  continue  to  be  dominated  by  the  mo- 
tives which  now  control  them,  the  one  is  as  defensible,  econom- 
ically, as  the  otlier.  It  is  not  such  payment,  as  has  already 
been  pointed  out,  that  is  ground  for  dissatisfaction  with  the 
institution  of  private  property,  so  much  as  the  unequal  distribu- 
tion of  wealth  that  accompanies  it. 

§344-    An  unequal  distribution  of  wealth  must  result  from  Unequal 
the  institution  of  private  property  so  long  as  individuals  and  f?on  o?"" 
families  differ  greatly  in  earning  capacity  and  in  prudence  and  Wealth 
forethought.     Where  these  conditions  prevail  some  individ-  J^om'ln- 
iials  and  families  enjoy  large  incomes,  and  out  of  these  incomes  equalities 
set  aside  for  investment  large  savings,  while  others  accumulate  iJdivfduals 
little  or  nothing.      In   some   families  wealth   and   the   quali- 
ties   necessary    to    its    preservation    become    hereditary,    and 
great    fortunes    are    passed    on    from    parents    to    children 
through   several   generations.      ]\Iore    frequently    the   wealth 
*  C/.  Sections  306,  307,  30S,  and  336. 


59^  Economic  Progress 

accumulated  in  one  generation  is  gradually  dissipated  either 
through    division   among   numerous   heirs   or   because   those 
who  inherit  it  lack  either  the  capacity  or  the  inclination  to 
keep  it  unimpaired.     So  long  as  a  fair  degree  of  equality  of 
economic  opportunity  is  preserved  the  influences  which  make 
for  the  disintegration  of  large  accumulations  of  wealth  are 
likely  to  predominate,  and  the  very  rich  men  of  each  generation 
are  likely  to  be  those  who  have  acquired  the  greater  part  of 
their  fortunes  during  their  own  lifetimes.     This  has  been  the 
case  in  the  United  States  up  to  the  present  time,  and  there  is 
nothing  in  the  practice  of  paying  interest  and  rent  for  the  use 
of  property  fairly  acquired  that  threatens  to  make  it  less  the 
case  in  the  future. 
ancrTaxes       Although  hereditary  fortunes  are  usually  dissipated  after  a 
few  generations,  it  is  still  true  that  much  of  the  wealth  in  exist- 
ence at  any  one  time  has  been  inherited  by  those  who  own  and 
enjoy  it.     The  possession  of  such  wealth  cannot,  for  obvious 
reasons,  be  justified  on  the  ground  of  any  special  merit  on  the 
part  of  its  owners,  and  it  is  for  this  reason  that  inheritance 
taxes  are  so  generally  approved  by  thoughtful  persons.     In 
resorting  to  this  form  of  taxation,  it  must  not  be  forgotten, 
however,  that  the  prospect  of  bequeathing  property  to  one's 
children  or  other  heirs  is  one  of  the  principal  motives  to  saving 
and  accumulation.     Moderate  inheritance  taxes  probably  in- 
fluence  but   little  the   rate  at   which   the   fund  of   capital   is 
increased,  but  no  very  drastic  use  of  this  form  of  taxation 
could  be  made  without  weakening  one  of  the  incentives  to  in- 
dustry and  thrift  and  in  this  way  injuring  the  whole  com- 
munity more  than  it  would  be  benefited  by  a  more  equal  distri- 
bution of  wealth. 

the?uture  ^  ^^^'  ^^^  review  of  the  circumstances  which  have  contrib- 
uted to  the  economic  progress  of  the  past  that  has  been  given 
indicates  the  conditions  upon  which  the  economic  progress  of 
the  future  must  depend.  Changes  in  wants  and  in  habits  of 
consumption  calculated  to  increase  the  satisfaction  which  men 
derive  from  goods,  and  to  lessen  the  cost  involved  in  their  pro- 
duction, must  continue  to  be  made;  methods  of  production 
must  be  further  perfected  by  improvements  in  the  capital 
goods  used,  by  a  fuller  utilisation  of  the  forces  of  nature,  by 


The  Regulation  of  Monopolies         599 

an  increase  in  the  fund  of  capital,  by  a  better  organisation  of 
industry,  and  by  a  steady  imi)rovement  in  the  efficicnc}-  of  the 
working  population ;  the  distribution  of  the  social  income 
must  be  modified  so  that  the  command  over  economic  goods 
enjoyed  by  the  rank  and  file  in  the  industrial  army  will  be 
ever  larger.  ' 

Some  of  the  reforms  that  will  assist  towards  these  ends  may  The 
profitably  be  recalled.     Isolated  workmen  often  fail  to  secure  the  of  Labour 
earnings  to  which  they  are  economically  entitled  because  they  Unions 
do  not  bargain  on   terms  of  equality  with  their  employers. 
Trade  unions  are  the  agencies  that  must  be  relied  upon  to  cor- 
rect these  inequalities.     So  long  as  they  do  not  try  to  become 
close  monopolistic  associations,  but  confine  their  activities  to 
securing  the  best  terms  possible  for  their  freely  admitted  mem- 
bers, they  merit  all  the  encouragement  and  assistance  that  can 
be  given   them.   Notwithstanding  numerous  exceptions,  their 
general  tendency  is  towards  improving  the  condition  of  wage- 
earners  and  rendering  more  harmonious  and  cordial  the  rela- 
tions between  the  latter  and  employers. 

For  wage-earners  among  whom  trade  unions  can  be  organ-  Of  Labour 
ised,  state  interference  to  prevent  the  making  of  socially  disad-  ^^^^ 
vantageous  labour  contracts  may  not  be  necessary.  In  the  case 
of  great  industrial  classes,  however,  nothing  but  an  aggressive 
policy  of  interference  to  establish  the  plane  of  competition  can 
serve  to  protect  workmen  from  unduly  long  hours  under  in* 
sanitary  conditions.  The  codes  of  labour  law  already  adopted 
must  be  extended  and  perfected,  and  in  time  may  have  to  em- 
brace even  prescriptions  in  regard  to  the  minimum  rates  of 
pay  that  will  be  tolerated  in  certain  employments.  Side  by 
side  with  this  policy  of  regulation  must  be  developed  agencies 
for  caring  adequately  for  the  unemployable  and  for  protecting 
from  their  deadly  competition  the  individuals  and  families  that 
are  capable,  under  proper  conditions,  of  independent  self- 
support. 

In  certain  industries  free  competition  has  proved  itself  in-  The 
capable  of  regulating  economic  relations  as  the  general  inter-  ^f^^" 
est  requires.     Some  industries  are  monopolies  by  their  very  Monopolies 
nature,  others  have  become  monopolies  because  of  defects  in 
the  legal  system.     In  relation  to  such  industries  the  function 


6oo 


Economic  Progress 


Of 

Housing 
Conditions 


Free 

Public 
Schools 


Tax 
Reform 


of  the  state  is  clear.  Natural  monopolies  should  be  controlled 
as  regards  the  charges  they  are  allowed  to  make  for  the  serv- 
ices they  render,  and  sometimes  as  regards  also  the  quality  of 
these  services.  When  this  control  can  only  be  exercised  effect- 
ively through  the  expedient  of  government  ownership  and 
operation,  the  latter  should  be  fearlessly  undertaken.  Only  by 
such  means  can  the  interests  of  the  public  be  safeguarded  and 
injustice  prevented.  Monopolies  that  have  arisen  because  of 
defective  laws  or  public  policies  should  be  attacked  through 
such  laws.  It  is  the  duty  of  the  state,  so  long  as  it  continues 
to  permit  free  competition,  to  enforce  fair  competition,  and 
appropriate  measures  to  this  end  must  be  devised  and  put  into 
execution. 

The  same  reasons  that  make  factory  regulations  necessary 
to  the  health  and  safety  of  factory  employees  make  necessary 
the  effective  regulation  of  housing  conditions  in  great  cities. 
The  ignorant  and  careless  who  submit  to  insanitary  work- 
rooms will  submit  as  readily  to  insanitary  homes  unless  the 
state  or  city  interferes  to  enforce  minimum  standards  of 
cleanliness  and  decency. 

Even  more  important  than  increased  attention  to  public 
health  is  increased  attention  to  public  education.  For  reasons 
that  have  been  given,  parents  cannot  be  depended  upon  to 
demand  as  high  standards  of  education  for  their  children  as  it 
is  to  the  general  interest  that  children  should  enjoy.  The  state 
must  interfere  to  provide  adequate  schools  and  to  compel  at- 
tendance at  such  schools,  or  others  of  similar  grade,  and  its 
expenditures  for  this  purpose,  so  long  as  they  are  calculated 
to  improve  the  educational  advantages  offered,  can  hardly  err 
on  the  side  of  excess. 

In  the  chapters  treating  of  the  tariff  and  of  tax  reform 
(XX.  and  XXVIII.)  reasons  have  been  given  for  the  belief 
that  the  protective  tariff  of  the  United  States  has  outlived  its 
usefulness  and  changes  which  it  was  thought  would  make  the 
taxing  system  of  the  country  both  fairer  and  easier  to  admin- 
ister have  been  suggested.  Reform  in  the  methods  of  taxation 
is  the  more  important  because  the  economic  progress  of  the 
future  is  certain  to  involve  a  large  increase  in  public  expendi- 
tures.    Public  revenues  must  be  drawn  from  the  incomes  of 


Progress  Depends  on  the  Individual     60 1 

those  who  can  best  afiford  to  contribute  to  the  common  fund,  if 
the  benefits  of  such  increase  are  not  to  be  offset  by  the  curtailed 
incomes  of  those  whose  earnings  are  already  all  too  small. 

The  above  are  some  of  the  minor  reforms  which  the  author  Progress 
would  urge  as  substitutes  for  the  radical  changes  proposed  by  ^-'^P^^^s 
advocates  of  land  nationalisation  and  socialism.  They  belong  Individual 
distinctly  to  the  present  and  the  immediate  future,  while  the 
latter  nuist  be  deferred  to  a  future  so  remote  that  present 
discussion  of  them  is  of  doubtful  value.  If  economic  prog- 
ress is  to  follow  from  these  changes,  they  must  result  in 
steady  improvement  in  the  standards  of  living  and  of 
efficiency  of  the  wage-earners  in  each  community.  For,  at 
last  analysis,  every  effort  to  improve  conditions  which  is  not 
registered  in  the  character  and  capacity  of  the  average  indi- 
vidual must  prove  futile.  Unless  he  responds  to  the  enlarged 
opportunities  that  arc  presented  to  him,  there  is  no  hope  of 
permanent  betterment.  That  he  will  respond,  and  that  rising 
standards  of  living  will  exercise  the  needed  control  over  the 
growth  of  population,  so  that  improvement  in  the  quality  of 
life  will  be  as  conspicuous  a  characteristic  of  the  future  as 
an  increase  in  wealth  and  in  numbers  has  been  of  the  recent 
past,  are  beliefs  shared  by  the  majority  of  economists. 

§  346.  The  trend  of  wage  and  interest  rates  and  of  rent  in  Probable 

future  vears  cannot  safely  be  predicted  from  their  trend  in  the  Course  of 

•^         '^  v\  ages, 

past.     All  that  can  be  said  is  that  if  present  tendencies  con-  Interest, 

tinue  to  operate,  certain  results  will  follow.  If  the  progress  f^  th^^'^^ 
in  production  that  may  be  confidently  predicted  continues  to  Future 
be  accompanied  by  a  gradual  rise  in  the  standards  of  living  of 
the  working  classes,  there  must  be  a  steady  increase  in  wages. 
One  effect  of  such  an  increase  will  be  a  larger  and  larger  accu- 
mulation of  capital  on  the  part  of  wage-earners  themselves,  and 
this,  added  to  the  capital  accumulated  by  other  classes,  will 
have  a  tendency  to  reduce  the  rate  of  interest.  There  is  little 
reason,  however,  for  expecting  anything  more  than  a  very 
gradual  fall  in  interest,  or  that  the  rate  will  be  lowered  to  noth- 
ing within  many  decades  or  even  centuries.  Opposed  to  such 
a  result  are  the  discoveries  of  ever  new  uses  for  capital  goods 
that  are  certain  to  be  made,  and  the  lessened  rate  of  accu- 
mulation on  the  part  of  capitalists  that  may  be  expected  as  their 


Economic 

Progress 

and  the 

Moral 

Elevation 

of  the 

Race 


602  Economic  Progress 

incomes  from  capital,  in  consequence  of  the  decline  in  interest 
itself,  become  smaller  and  smaller.  The  future  course  of  rent 
will  depend  upon  the  relation  between  the  growth  of  popula- 
tion and  the  progress  that  is  made  in  utilising  to  better  advan- 
tage the  world's  natural  resources.  The  aggregate  rent  fund 
is  certain  to  increase  as  it  has  in  the  past,  as  the  area  of  the 
earth's  surface  turned  to  economic  account  increases.  This 
may  not,  however,  involve  any  lowering  in  the  margin  of  cul- 
tivation any  more  than  has  the  progress  of  the  last  one  hun- 
dred years. 

To  predict  whether  the  above  changes,  which  may  be  said 
to  be  in  progress  at  the  present  time,  will  continue  uninterrupt- 
edly is  no  part  of  the  task  of  science.  As  in  the  past,  so  in  the 
future,  new  conditions  and  new  forces  are  likely  to  present 
themselves,  which  will  cause  the  anticipations  of  present-day 
economists  to  seem  as  baseless  as  many  of  those  of  Adam 
Smith  and  his  immediate  followers  have  already  been  proved 
to  have  been. 

§  347.  The  impression  almost  necessarily  left  upon  the  mind 
by  a  treatise  on  economics  is  of  a  somewhat  hard  and  material 
view  of  life.  In  concentrating  attention  upon  goods  and  the 
satisfactions  which  result  from  them,  the  economist  seems  to 
ignore  love,  religion,  and  other  things  that  are  truly  great  and 
admirable  in  the  world.  Excuses  that  may  be  urged  in  his 
behalf  readily  suggest  themselves.  He  may  not  justly  be 
accused  of  ignoring  love  and  religion  because  he  has  little  to 
say  of  them.  Like  other  specialists,  he  must  confine  himself 
rigidly  to  his  particular  subject  if  he  is  to  contribute  anything 
of  value  to  the  sum  of  human  knowledge.  But  the  charge  is 
not  so  easily  answered.  Economists  profess  to  concern  them- 
selves with  the  conditions  upon  which  human  well-being  de- 
pends. They  talk  of  satisfactions,  of  pleasures  and  pains,  of 
progress.  Can  they  have  anything  final  to  say  on  these  sub- 
jects when  they  pass  over  the  very  experiences  which,  in  the 
opinion  of  so  many  persons,  make  life  most  worth  living?  It 
must  freely  be  confessed  that  they  cannot.  Basing  their  con- 
clusions on  a  study  of  the  economic  side  of  life,  they  can  claim 
finality  for  them  only  as  respects  economic  relations.  The  sat- 
isfactions they  discuss  are  satisfactions  connected  with  goods, 


True  Goal  of  Economic  Progress       603 

or  the  activities  necessary  to  the  production  of  goods.  Whether 
an  increase  in  these  satisfactions  really  contributes  to  the  moral 
elevation  of  the  race  is  a  problem  that  can  be  decided  only  by 
reference  to  broader  considerations  than  fall  properly  within 
the  field  of  economics.  An  economist  may,  nevertheless,  be 
pardoned  a  closing  word  touching  this  vital  matter. 

Economic  progress  is  something  more  than  a  progressive  'The  True 
advance  towards  a  state  of  society  in  which  all  individuals  will  Economic 
be  superabundantly  supplied  with  goods.  It  includes  in  its  view  Progress 
activities  as  well  as  the  satisfactions  connected  with  consump- 
tion. Economically  speaking,  it  is  quite  as  important  to  get 
rid  of  the  pains  of  production  as  to  add  to  the  pleasures  of  con- 
sumption. The  economist's  ideal  is  thus  a  world  in  which 
wants  and  the  activities  of  production  are  so  harmoniously 
adjusted  to  each  other  that  the  field  of  industry  offers  full 
scope  to  all  for  the  exercise  of  those  faculties  and  capacities 
from  which  they  get  the  greatest  benefit  and  happiness,  at  the 
same  time  that  it  rewards  all  with  the  goods  which  they  most 
require.  Up  to  the  present  time  progress  has  been  mainly  in 
the  direction  of  adding  to  goods.  It  is  necessary  to  raise  con- 
sumption to.a  certain  standard  before  it  can  be  appreciated  that 
additional  comforts  and  luxuries  are  dearly  bought  at  the  price 
of  uncongenial  toil,  and  before  due  attention  can  be  attracted 
to  the  other  line  of  development.  When  this  standard  is 
reached,  however,  the  choice  of  occupations  will  begin  to  be 
made  with  greater  reference  to  the  tastes  of  individuals  as  pro- 
ducers, and  with  less  regard  to  their  need  for  goods  as  consum- 
ers. Progress  from  this  point  forward  will  be  towards  more 
and  more  congenial  work  for  all  rather  than  towards  a  further 
multiplication  of  goods.  If  contemporary  economic  discus- 
sions seem  to  over-emphasise  the  importance  of  goods  or 
wealth  and  to  give  too  little  heed  to  worthy  and  ennobling 
activities,  it  is  not  because  this  is  an  essential  characteristic  of  ^ 
economics,  but  because  it  is  still  true  that  the  mass  of  men  are 
all  too  poorly  supplied  with  goods,  and  that  for  them  the  prob- 
lem of  most  pressing  concern  is  how  this  deficiency  may  be 
relieved.  For  the  middle  and  upper  classes  in  the  economic 
scale  deficiency  of  goods  has  already  ceased  to  be  a  ground  for 
anxiety.    The  real  economic  evil  for  them  is  deficiency  in  con- 


6o4  Economic  Progress 

genial  pursuits,  and  the  economist  may  unite  with  the  morahst 
in  urging,  in  their  case,  less  concern  about  material  comforts 
and  more  concern  about  the  way  in  which  the  working  life  is  to 
be  spent. 
Conclusion  Economic  progress  is  by  no  means  the  end  of  life,  but,  con- 
ceived in  a  broad  way,  it  is  fundamental  to  all  progress.  A  cer- 
tain control  over  material  goods  is  essential  to  appreciation  of 
all  higher  goods.  Given  control  over  the  necessaries  and 
comforts  indispensable  to  well-rounded  existence,  the  next  step 
is  to  find  work  which  will  afford  scope  for  one's  highest  facul- 
ties. This  quest,  which  is  purely  economic,  affords  opportunity 
for  the  best  and  highest  development  of  which  human  beings 
are  capable.  For  persons  with  artistic  imagination  and  the  cre- 
ative faculty  it  will  mean  the  choice  of  artistic  professions  or 
crafts ;  for  those  with  scientific  curiosity  and  the  love  of  study 
it  will  mean  the  selection  of  scientific  pursuits ;  finally,  for  the 
great  mass  of  men,  who  are  now,  and  probably  will  continue 
to  be,  neither  artists  nor  scientists  by  nature,  it  will  mean  the 
choice  of  those  occupations  which  will  enable  them  to  minister 
most  largely  to  the  wants  of  others  and  in  this  way  to  satisfy 
most  fully  their  social  aspirations.  For,  if  men  are  now  self- 
seeking  in  a  narrow  sense,  it  is  because  the  hard  struggle  for 
existence  to  which  they  have  owed  their  development  in  the 
past  has  made  them  so.  As  goods  become  more  plentiful,  the 
larger  social  self,  which  already  directs  the  lives  of  so  many 
so-called  unselfish  persons,  will  become  dominant.  Its  satis- 
faction will  demand  a  constant  ministering  to  the  wants  of 
others,  just  as  the  satisfaction  of  the  narrower  self  of  the  aver- 
age man  now  demands  constant  attention  to  personal  wants 
and  the  wants  of  the  family.  Thus,  if  the  study  of  economics 
seems  to  involve  a  hard  and  material  view  of  life,  it  is  because 
we  still  live  in  a  hard  and  material  age.  The  economist's  ideal 
is  not  only  not  inconsistent  with  the  moral  elevation  of  the  race, 
but  it  includes  that  elevation  as  one  of  its  necessary  elements. 
It  is  his  confident  expectation  that  men  will  grow  better  as  the 
conditions  of  their  economic  life  become  pleasanter;  and  his 
belief  that  they  can  grow  better  in  no  other  way  is  what  gives 
its  chief  interest  to  his  subject. 


INDEX 


INDEX 


Abraham,  M.  E.,  433 

Adams,  H.  C,  62,  546,  562;  T.  S., 

411 
Agriculture,  in  U.  S.,  33  f)  U.  S. 

Department  of,  80 
America,  importance  of  discovery 

of,  9 
American  Desert,  the,  25 
American    Sugar    Refining    Com- 
pany, the,  organisation  of,  478; 

dividends  of,  485 
Anthracite      Coal      Strike      (see 

Strike) 
Anti-trust  Act,  the  Sherman,  500; 

the,  of  Ohio,  501  f;  futility  of, 

policy,  502 
Apprentices,  Statute  of,  10 
Arbitration,  voluntary,  399;   State 

boards  of,  399  f ;  justification  of 

compulsory,  400 ;  compulsory,  in 

New    Zealand,    401    f;    in    New 

South  Wales,  402  f 
Arkwright,  Richard,   13 
Ashley,   W.   J.,    19 
Assize  of   Bread  and   Ale,  9;    of 

cloth,  9 
Atwater,  W.  O.,  71,  80 
Aulnagers,  9 

Backhouse,  Judge,  411 

Balance  of  trade,  11;  in  U.  S., 
42  f 

Banking  System,  of  U.  S.,  338  f? ; 
defects  in,  of  U.  S..  340  ff 

Bank-notes,  functions  of,  331   f 

Banks,  functions  of,  324  f;  de- 
posit business  of,  328;  loans  of. 
328  ff ;  limits  to  business  of.  334 
f;  arguments  for  regulation  of, 


336    ff;    services    rendered    by, 

343  f 

Bargaining,   collective,   arguments 
for  and  against,  393  fif 

Barter,  disadvantages  of,  302 

Bastable,  C,  F.,  62,  384,  562 

Bellamy,  E.,  socialism  of,  526,  532 

Bemis,  E.  W..  459 

Bimetallism,  international,  355;  in 
U.  S.,  357  f 

Birth-rates,  in  Europe,  284  f 

Black  Death,  the,  7 

Bohm-Bawerk,    E.    von,    61,    106, 
136.  282.  301,  532 

BoUes,  A.  S.,  344 

Bonar,  J.,  61  f 

Boon-day  work.  3 

Bounties,  on  corn,  11 

Bowker,  R.  R.,  62 

Boycott,  definition  of  the.  397 ;  ex- 
amples of  use  of  the,  397  f 

Brooks,  J.  G.,  411 

Biicher,  K.,  61 

Budgets,    family,   statistics   of,   "]"] 
ff ;  collection  of,  80 

Bullock,  C.  J„  62,  204,   588 

Buyers,  calculations  of,  98  f 

Cairnes,  J.  E.,  234 

Cannan,  E.,  61  f 

Capital,  definition  of,    108;   origin 

of,    125;   advantages  of,    125   f; 

and  capital  goods,  126  f;  kinds 

of,  127;  accumulation  of,  130  ff ; 

the  mobility  of,  244  ff ;  growth 

of,  in  United  Kingdom,  294 ;  in 

U.  S.,  294  f 
Carver,  T.  N..  106,  136,  168,  187, 

243,  264,  588 


607 


6o8 


Index 


Cartvvright,  Edmund,  14 

Chapman,  J.  W.,   581'. 

Checks,  the  function  of,  326  f ;  use 
of,  in  U.  S.,  Z'2'7 

Cheyney,  E.  P.,  19 

Clark,  J.  B.,  60,  62,  106,  136,  168, 
243,  264,  301,  509 

Clearing-houses,  the  function  of, 
326  f 

Coal,  importance  of,  to  England, 
13;  in  U.  S.,  36  f 

Coinage,  debasements  of,  10;  reg- 
ulation of,  307 ;  history  of,  in  U. 
S.,  309  f,  312  f ;  probable  conse- 
quences of  free,  of  silver,  357  f 

Colonies,  American,  conditions  in, 
20 

Comans,  Miss  K.,  45 

Combination,  Anthracite  Coal,  in 
U.  S.,  444  ff 

Common,  town,  6 

Commons,  J.  R.,  411 

Communism,  definition  of,  524 

Competition,  influence  of,  on 
prices,  loi  ff;  between  workmen 
and  capital  goods,  258  f 

Cenant,  C.  A.,  344 

Conrad,  J.,  61 

Consumers'  Leagues,  work  of,  in 
U.  S.,  591 

Consumption,  definition  of,  51 ; 
adaptation  of,  to  environment, 
69;  to  tastes  of  producers,  69  f ; 

•  to  laws  of  production,  70  f ;  eco- 
nomical, 71  f;  statistics  of,  76 
ff;  relation  of,  to  production,  79 
f;  progress  in,  590  ff 

Co-operation,  kinds  of,  137;  dis- 
tinguished from  copartnership, 
143 ;  qualities  necessary  to,  139 ; 
advantages  of,  139  f ;  disadvan- 
tages of,  140  f ;  progress  in,  142 
(see  Copartnership) 

Copartnership,  labour,  history  of, 
in  Great  Britain,  513  ff;  slight 
dcTeloproent  of,  in  U.  S.,  515; 
obstacles  to  extension  of,  516  ff 


Copper,  production  of,  in  U.  S., 
Z7 

Copyright,  law  of,  in  U.  S.,  442  f 

Corn,  importance  of,  to  U.  S., 
Z2>  f 

Corporations,  description  of,  145 ; 
advantages  of,  145  f ;  disadvan- 
tages of,  146  ff;  disregard  of 
public  interest  by,  147;  the, 
problem,  148  f ;  taxes  on,  555  f 

Cort,  Henry,  14 

Cossa,  L.,  62 

Cost,  law  of  least  social,  68  ff; 
marginal,  definition  of,  84;  rela- 
tion to  value  of,  84  f ;  91  ff 

Cost  of  production,  definition  of, 

53  f 

Cotton,  in  U.  S.,  35 ;  manufac- 
tures of,  41  f 

Cotton  Gin,  invention  of,  '>>2 

Court,  decision  of  U.  S.  Supreme, 
in  Utah  eight-hour  law  case, 
418  f 

Courts,  American,  conflicting  de- 
cisions of,  in  labour  cases,  416 
ff 

Craft  guilds,  6 

Credit,  the  nature  of,  323 ;  book. 
323  f;  bank,  325  ff;  forms  of, 
Z27 ;  interest  for  use  of,  m  f; 
and  money,  347 

Crompton,   Samuel,  14 

Crusoe,  Robinson,  valuations  by, 
81  ff 

Cultivation,  intensive  and  exten- 
sive, 115  f 

Cunningham,  W.,  19 

Daniels,  W.  M.,  562 
Darwin,  L.,  360,  459 
Davidson,  J.,  243 
Davies,  A.  L.,  433 
Dawson,  W.  H.,  532 
Death-rates,  in  Europe,  284  f 
Demand,   law   of,  66  f;   elasticity 

of,  66 
Dewey,  D.  R.,  322 


Index 


609 


Diminishing  returns  (see  Law  of) 

Discrimination,  by  railroads,  466 
ff 

Distribution,     definition     of,     56; 
description  of,    155   ff;    relation 
of,  to  production,  167;  limits  to 
theory  of,   167  f;  law  of,  260  f 
graphic    illustration    of,    268    f 
restatement   of   law    of,    273    f 
value    and,    275     f;     exchange 
theory  of,  276  ff;   ultimate  de- 
terminants of,  300  ff;   progress 
in,  593  ff;  reasons  for  unequal, 
of   wealth.   597   f 

Disutility,  relation  to  value  of 
marginal,  84  f ;  total,  87 

Division  of  labour  (see  Labour) 

Dixon,  F.  H.,  475 

Drage,  G.,  411 

Ducpetiaux,  TJ 

Dunbar,  C.  F.,  62,  322,  ^^4 

Durand,  E.  D.,.588 

Duties,  ad  valorem  and  specific, 
definitions  of,  374  n ;  customs 
(see  Tariff)  ;  internal  revenue 
(see  Taxes) 


Eastman,   F.  M.,   588 

Economic  man,  characteristics  of, 

47  f 
Economics,  definition  of,  i 
Economy,  of  different  foods,  72 
Edgeworth,  F.  Y.,  62 
Education,  importance  of,   120  f; 

intluence  of,  on  wages,  234  ff : 

as  an  investment,  241  f 
Edward  VI..  10 
Eight-hour  day.   Utah's,  law,  418 

f ;  question  of  a  universal  legal, 

4:22 
Electricity,  uses  of.  39 
Elizabeth.    9;    legislation    of,    10; 

grants  of  monopolies  by,  11 
Ely,   R.   T.,   60.  62,   80,   204.   411, 

459,    570,    588 
Emancipation  proclamation,  in  U. 

S.,  22 


Embargo  Act,  23 

Enclosures,  in  England,  7 

Engcl,  F.,  'J^ 

England,  Banrs.  of.  325 

Enterprises,  business,  classified, 
152 

Entrepreneur,  the,  description  of, 
55,  143  f ;  single,  system,  144  f ; 
conditions  fixed  for,  171 ;  power 
of  substitution  of,  171  ff 

Equality,  American  ideal  of,  21 

Equilibrium,  state  of  normal,  52, 
159  ff;  correspondence  with 
reality  of  the,  160  f 

Erie  Canal,  25  f 

Evolution,  relation  of,  to  produc- 
tion, 124  f 

Exchange,  foreign,  definition  of. 
361 ;  sterling,  determination  of 
rate  of,  362  ff;  ways  of  quoting 
foreign.  365 

Expenditures,  refutation  of  argu- 
ment in  defence  of  luxurious, 
74  f;  government  (see  Govern- 
ment expenditures) 

Expenses  of  production,  definition 
of,  54,  162;  differences  in,  due 
to  land.  III  f ;  elements  in  the, 
162  ff;  relation  of,  to  prices, 
165  f 

Exports,    changes    in,    of    U.    S., 

43 

Factory  system,  rise  of  the,  16;  ef- 
fects of  the,  17  f 

Failures,  in  United  States,  1893  to 
1901,  179 

Falkner,  R.  P..  360 

Families,  expenditures  of.  ^^  ff 

Fees,     as     sources     of     revenue, 

544 
Fetter,  F.  A.,  60.  80,  106,  136.  154, 

168.  187,  204,  243,  301,  509 
Firm,  the  representative,  152  f 
Foreign  trade  of  U.  S.,  42  f 
Fulton,  Rnbert.  14 
Fund,  replacement   (see  Replace- 


6io 


Index 


ment  fund);  wages  (see  Wages 
fund) 
"  Futures,"  dealings  in,  174  fif 

Gambling,  distinguished  from 
speculation,    176 

Garfield,  President,  375 

Gas  business,  a  monopoly,  448 

George,  H.,  argument  of,  for  the 
single  tax,  520  f ;  532 

Gibbins,  H.  de  B.,  19 

Gide,  C.,  60 

Giffen,  Sir  R.,  301 

Gilman,   N.   P.,  411,   531 

Gold,  in  U.  S.,  Zl  \  world's  stock 
of,  306 ;  the  value  of,  345  ff ;  de- 
mand for,  346  f;  supply  of,  351 
f;  points,  362  f ;  supply  of,  self- 
regulating,  366  f 

Goods,  economic  and  free,  defini- 
tions of,  48  f ;  present  vs.  future, 
64  f;  capital,  kinds  of,  127; 
classification  of,  132  f;  durable 
consumption,  a  source  of  in- 
come, 156  f ;  life  periods  of  cap- 
ital, 272;  future,  and  interest, 
2TJ  f;  preference  for  present, 
explained,  296  fif 

Government  expenditures,  in  U. 
S.,  533  ff;  justification  for.  535 
f;  and  private  contrasted,  536  f, 

538  f;    division    of,    in    U.    S., 

537  f 
Government  revenues,  sources  of, 

539  ff 

Grades,  of  workmen  in  U.  S.,  234 

ff 
Great    Britain,    labour    legislation 

of,  413  ff 
Greeley,   H.,  views  on  protection 

of,  375 
Greenbacks,  history  of,  315 
Gresham's    Law,    explanation    of, 

309  ff 
Groups,  non-competing,  of  Vv'ork- 

men,  240  f 
Guilds,  merchant,  5  ;  craft,  6 


Guild  system,  description  of,  5  ff; 

decay  of,  6  fif 
Gunton,  G.,  509 

Hadley,  A.   T.,  62,  264,  322,   344, 

475 
Halle,  E.  J.  von,  509 
Hamilton,  Alexander,  23 
Hargreaves,  James,  13 
Harmony,  law  of,  68 
Harrison,  A.,  433 
Hay,  production  of,  in  U.  S.,  34 
Hearn,  W.  E.,  80 
Henry  HI.,  9 
Henry  VH.,  9 
Henry  VHL,   9;    debasements   of 

the  coinage  of,  10 
Heredity,  influence  of,  on  wages, 

Hill.  J.  A..  573,  588 

History,  its  relation  to  economics, 

2 
Hobson.  J.  A.,  62 
Hollander,  J.    H.,   588 
Holyoake,  G.  J..  531 
Howe,  F.  C.,  587 
Howell,  G.,  411 
Huebner,   S.,  588 
Hutchins,  B.  L.,  433 

lies,  G.,  62 

Immigration  into  U.  S.,  29  ff 

Income,  uses  of,  compared,  74  ff; 
money,  definition  of,  156;  real, 
definition  of,  156;  real,  paid  out 
of  capital,  158;  funded,  defini- 
tion of,  200  f;  rent  a  type  of 
funded,  218;  taxes,  572  tif 

India,  monetary  system  of,  311 

Industrial  Commission,  Report  of 
the  U.  S.,  475,  509 

Industrial  Revolution,  description 
of  the,  12  fif 

Ingram,  J.  K.,  61 

Injunction,  use  of  the,  in  connec- 
tion with  strikes.  403  f;  argu- 
ments against,  404 


Index 


6ii 


Insurance  premiums,  an  expense 
of  production,  163 

Interest,  an  expense  of  production, 
163;  definition  of,  244;  rent  and 
wages  contrasted  with,  244;  in- 
fluence of  competition  on,  246 
flf;  causes  of  differences  in  rates 
of,  248  ff ;  on  money,  252  f ;  re- 
lation between  marginal,  and 
wages,  255  f ;  illustration  of  re- 
lation between,  and  wages,  261 
flF ;  dependence  of,  on  other 
shares,  263  f ;  restatement  of 
law  of,  271  f;  law  applies  to 
gross,  273;  justification  of,  597; 
probable  course  of,  in  the  tuture, 
601    f 

Interstate  Commerce  Act,  the,  462 
ff;  provisions  of  the,  469  f;  de- 
fects in  the,  470;  amendment  to 
the,  of  1903,  471  ;  need  of  fur- 
ther amendments  to  the,  474  f 

Interstate  Commerce  Commission, 
Reports  of  the,  467,  474,  475 

Investor,  the  "  innocent,"  in  con- 
nection with  monopoly  problem, 
201  f 

Iron,  production  of,  in  U.  S.,  35 
ff;  manufactures  of,  40  f 

Jenks,  J.  W.,  62,  509 
Jevons,  W.  S.,  61,  322,  360 
Johnson,  A.  S.,  221 ;   E.  R.,  475 ; 

J.    F..  204,   322,  360 
Jones,  B.,  531 
Judson,  F.  N.,  588 

Keynes,  J.  N.,  60 
Kirkup,  T.,  532 
Kinley,  D.,  322 
Kinsman,   D.  O.,  574,  588 
Knox,  J.  J.,  344 

Labour,  U.  S.  Department  of, 
T],  80;  influences  affecting  pro- 
ductiveness of,  120  ff;  division 
of,   described,   137   f;  influences 


affecting  division  of,  138  ff;  ob- 
stacles to  free  market  for,  383 
ff;  American  Federation  of, 
387;  regulation  of,  of  women, 
412,  420  f;  of  men,  413,  423;  in 
dangerous  trades,  410;  history 
of,  in  Great  Britain,  413  ff;  his- 
tory of,  in  U.  S.,  416  ff ;  of  chil- 
dren in  U.  S.,  419  f ;  arguments 
for  and  against,  431  f 

Labour  copartnership  (see  Co- 
partnership) 

Labour  movement,  future  of  the, 
410  f 

Labourer,  qualities  necessary  to 
efficiency  of  the,  120  f;  develop- 
ment of  the,  121  ff 

Labourers,  Statutes  of,  7 ;  dis- 
advantages   of,    in    bargaining, 

385  f 

Laisses-faire  policy,  description 
of,  15;  adoption  of,  in  Eng- 
land, 16 

Land,  analysis  of  productive  serv- 
ices of,  108  ff;  differences  in, 
no  f;  farm,  112;  mineral,  116; 
city  and  country,  117  f;  value 
of,  in  London,  118;  advantages 
of  private  property  in,  518  f ;  the 
present,  problem,  519  f 

Latin  Union,  monetary  policy  of 
the,  310  f 

Laughlin,  J.  L.,  322,  360 

Law,  its  relation  to  economics,  2; 
of  diminishing  utility,  63  ff ;  of 
demand,.  66  f ;  of  variety,  67  f ; 
of  harmony,  68 ;  of  least  social 
cost,  68  ff;  of  diminishing  re- 
turns, statement  of,  113  f;  ap- 
plication of,  to  labour,  128;  to 
capital,  129  f;  of  monopoly 
price,  194  ff ;  Gresham's,  309  ff 

Laws,  description  of,  of  Eco- 
nomics, 58  ff ;  labour,  part  of 
unions  in  securing,  409  f 

Le  Rossignol,  J.  E.,  459,  588 

Leslie.  J.  E.  C.  61 


6l2 


Index 


Levasseur,  P.  E.,  41/ 

Lewes,  G.  H-,  475 

Liability,  employers',  law  of,  in 
New  York  State,  428;  substitute 
for,  in  Great  Britain,  428  ff;  in 
Germany,  430 

Liberty,  American  ideal  of,  21 

List,  F.,  argument  of,  for  protec- 
tion, 373 

Lloyd,  H.  D,  509,  532 

Loans,  call  and  time,  distin- 
guished, 329  f  ;  interest  on  bank, 
332  ff ;  government,  541  ff ;  re- 
strictions on  government,  in  U. 
S.,  542  f 

Lockouts,  evils  connected  with, 
396  ff 

Locomotive,  invention  of,  14 

Lodge,  H.  C.,  45 

Louisiana,  purchase  of,  24 

Luxury,  72  ff;  definition  of,  7^,; 
maxim  concerning,  72, ;  fallacies 
about,  75  f;  defensible,  75  f 

Macleod,  H.  D.,  344 

Malthus,    T.    R.,    61 ;    theory    of 

population  of,  285  ff 
Man  (see  Economic  man) 
Manorial   System,   description  of, 

2  ff 
Manors,  average  size  of,  3 
Manufacturing  in  U.  S..  39  ff 
Margin    of    cultivation,    intensive 

and  extensive,  contrasted,  115  f 
Margin  of  production,  wage  and 

interest  rates  determined  at  the, 

256  f 
Marginal     interest,     how     deter- 
mined, 255  ff 
Marot,  H.,  433 

Marriage-rates,  in  Europe.  284  f 
Marshall,  A.,  60,  62,  80,  106,  119, 

136,  154,  168,  187,  204,  221,  243, 

264.  301 
Marx,  K.,  the  socialism  of,  530  f; 

532 
Mayo- Smith,  R.,  80,  301 


IMcMaster,  J.  B.,  45 

Meade,  E.  S.,  509 

Menger,  A.,  532;   C.,  61 

Mercantile  System,  description  of 
the,  II  f 

Merchant  Guilds,  5  f 

Metayer    system,    description    of, 
219  f 

Methods,  of  economics,  descrip- 
tion of,  56  f 

Mill,  J.  S.,  61,  221 ;  statement  of 
wages-fund  theory  by,  280,  282 

Millis,   H.  A.,   569,   588 

Mining  in  U.  S.,  35  ff 

Mississippi,  Valley  of  the,  25 

Mitchell,  J.,  411 

Mobility  of  capital,  244  ff 

Monetary  system,  of  India,  311; 
of  U.  S.,  313  ff;  321 

Money,  in  Middle  Ages.  4 ;  its  im- 
portance, 6  f;  value  of,  97  f; 
interest  for,  252  f ;  functions  of, 
302  ff ;  value  of,  and  prices,  304 ; 
stability  in  value  of,  desirable, 
304 ;  commodities  used  for,  304 
f ;  qualities  of  a  good,  305  f ; 
precious  metals  as,  306;  state 
regulation  of.  307 ;  standard, 
credit,  and  token,  distinguished, 
308;  function  of  token,  318  f; 
function  of  credit,  319  f ;  objec- 
tions to  credit,  320  f ;  and  credit, 
347  f ;  method  for  measuring  the 
value  of,  352 

Monopolies,  in  sixteenth  century, 
11;  labour,  objections  to,  408; 
legal,  in  U.  S.,  434  f;  private 
legal,  in  Great  Britain.  436  f; 
importance  of  natural,  443;  of 
situation,  443  ff;  of  organisa- 
tion, 446  ff ;  problem  of  munici- 
pal, 454  ff;  methods  of  regulat- 
ing municipal,  457  f;  national, 
460 

Monopoly,  definition  of,  188; 
distinguished  from  differential 
advantage,   188;   kinds  of.   189; 


Index 


613 


importance  of,  in  U.  S.,  1S9  f; 
checks  on,  191  ff;  and  the  pub- 
lic, 202;  influence  on  production 
of,  203  f ;  influence  of,  on  shares 
of  income  in  competitive  in- 
dustries, 267  f;  importance  of, 
problem,  434 ;  profits  from 
patents,   441 

Montague,  G.  H.,  509 

Motives,  economic,  46 

Murphy,  E.  G.,  433 

National  banks  (see  Banking  sys- 
tem of  U.  S.) 

National  System,  the,  9  fif 

Natural  gas,  production  of,  in  U. 
S.,  38 

Necessaries,    economic,    definition 

of,  n 
Negroes  in  U.  S.,  30  f 
Nettleton,  A.  B.,  509 
Nicholson,  J.  S.,  62,  119,  136,  154, 

221,  301,  322 
North,  S.  D.,  433 
Noyes,  A.  D.,  322 

Palgrave,  I.,  60  f 

Partnership,  description  of,  144  f 

Patents,  number  granted  in  U.  S., 
1837  to  1900,  190;  system  of,  in 
Great  Britain,  437 ;  in  U.  S., 
438;  arguments  for  and  against, 
438  f;  needed  reforms  in,  in  U. 
S.,  440  f ;  as  a  source  of  monop- 
oly profits,  441 

Patten,  S.  N..  62,  80.  384,  587 

Peasants'  Revolt,  the,  7 

Petroleum,  production  of,  in  U.  S., 
38 

Physiocrats,  the,  107 

Pierson,  N.  G.,  106,  136,  187,  243, 
264,  282,  322.  384 

Pin-making,  description  of,  in 
1776  and  to-day,  142 

Plehn,  C.  C,  562,  588 

Plener,  E.  von,  description  of  min- 


ing industry  in  Great  Britain  in 
1840  by,  414  f;  433 

Political  Economy  (see  Econom- 
ics) 

Politics,  its  relation  to  Economics, 
2 

Population,  proportion  of,  living 
in  cities  in  England,  4;  of  U.  S., 
29;  distribution  of.  in  U.  S.,  30 
f;  32;  statistics  of,  of  Europe, 
283  f;  Malthusian  doctrine  of, 
285  f¥;  checks  on,  288  fT;  a 
stationary,  290  f;  effects  of 
growth  of,  594 

Power,  water,  used  in  manu- 
facturing,   113 

Power   loom,    14 

Precious  metals,  export  of,  pro- 
hibited, II 

Price,  definition  of,  50  f;  one, 
system,  103;  law  of  monopoly, 
194  flf;  relation  to  actual  price, 
196;  restatement  of  law  of, 
266 

Price,  L.  L.,  19,  61 

Prices,  determination  of,  98  flf; 
one  buyer  and  one  seller,  99 ; 
several  buyers.  99  f ;  several 
sellers,  loi  ;  competitive,  loi  flf; 
market,  104;  normal,  104;  sum- 
mary of  theory  of,  105 ;  normal, 
just  cover  expenses,  166;  fluc- 
tuations in,  a  source  of  profits, 
172  ff;  rising  and  falling.  177 
flf;  method  of  measuring  level 
of,  352  f;  reasons  for  fluctua- 
tions in,  354  f 

Producers,  relation  of,  to  con- 
sumers, 266 

Product,  net,  definition  of,  155; 
relation  between  net,  and  real 
income.  159  f 

Production,  definition  of,  51 ;  ex- 
penses of  (see  Expenses)  : 
analysis  of.  107;  Physiocratic 
theory  of.  107;  Adam  Smith's 
theory    of.     107;    primary    and 


6i4 


Index 


secondary  factors  in,  io8;  capi- 
talistic, description  of,  125  f, 
157  f ;  its  advantages,  126;  prog- 
ress in,  134  f;  large  vs.  small 
scale,  contrasted,  149  fi;  rela- 
tion of,  to  distribution,  155  ff ; 
relation  of,  to  distribution, 
graphically  illustrated,  268  f; 
progress  in,  592  f 
Profits,  net  or  competitive,  172  ff ; 
influence  of  price  changes  on, 
172  ff,  177  ff;  influence  of  in- 
ventions on,  179  f;  influence  of 
improvements  in  production  on, 
181 ;  elimination  of,  by  compe- 
tition, 181  f;  influence  of  vari- 
ableness of  climate  on,  182  f; 
insurance  equalises,  183 ;  influ- 
ence of  changes  in  wages  and 
interest  on,  185  f;  monopoly, 
188  ff;  ways  of  concealing  mo- 
nopoly, 198  ff;  contrasted  with 
other  shares  in  distribution, 
205 ;  monopoly,  from  patents, 
441  ;  from  street  railways  in 
U.  S..  453  f;  justification  of 
competitive,  595 ;  of  monopoly, 
596   f 

Profit-sharing,  forms  of,  510  ff; 
objections  to  sliding-scale  sys- 
tem of,  510;  advantages  of, 
512  f 

Progress,  due  to  changes  in  taste, 
70;  definition  of  economic,  589; 
indications  of,  589  f;  in  con- 
sumption, 590  ff;  in  production, 
592  f ;  in  distribution,  593  ff;  in 
the  future,  596  f;  conditions 
favourable  to,  599  ff;  goal  of 
economic,  603  f;  conclusion  in 
reference  to  economic,  604 

Property,  private,  in  U.  S.,  21 

Protection,  origin  of,  in  U.  S.,  22 
f ;  definition  of,  370;  history  of, 
in  U.  S.,  371  ff;  arguments  for, 
371  ff;  burden  of,  in  U.  S.,  277; 
future  of,  in  U.  S.,  381  f 


Public  lands,  as  source  of  revenue 
in  U.  S.,  539  f;  in  Texas,  540 

Rae,  J.,  61  f;  532 

Railroads,  in  U.  S.,  27  f;  monop- 
olistic features  of,  461  ff;  com- 
binations of,  in  U.  S.,  461  f; 
capital  invested  in,  in  U.  S., 
468;  profits  of,  in  U.  S.,  468  f; 
efforts  at  regulation  of,  in  U.  S., 
469  f;  arguments  for  and 
against  national  ownership  of, 
in  U.  S.,  471  ff 

Rand,  E.  B.,  45 

Ratio,    mint,     definition    of,    309;. 
commercial,  311   n 

Reeves,  W.  P.,  411 

Reform,  plans  of  economic,  510 

Rent,  definition  of,  113,  206;  an 
expense  of  production,  164; 
explanation  of,  206  ff;  graphic 
illustration  of,  207;  fertility 
and  situation,  causes  of,  208- 
ff;  the  calculation  of,  210  f; 
theory  of,  explained  graphically, 
211  f;  of  sources  of  water 
power,  213;  of  mines,  213  f; 
apparent  exceptions  to  law  of, 
214  ff;  and  interest  on  fixed 
capital,    216;    capitalisation    of, 

217  f;    summary   of  theory   of, 

218  f;  of  buildings,  220;  im- 
portance of,  220  f;  restatement 
of  law  of,  269  f;  justification 
oi,  597 ;  policy  of  government 
towards,  597;  probable  course 
of,   in   the   future,   601   f 

Replacement  fund,  definition  of, 
155  f;  an  expense  of  produc- 
tion, 163 ;  calculation  of  the, 
272 

Reserve,   the   U.    S.    gold,    315    i',. 
demand  for  gold,  349  f 

Revenues,  government  (see  Gov- 
ernment  revenues) 

Ricardo,  D.,  61 

Ripley,  W.  Z,  509 


Index 


615 


Robinson,  M.  H.,  588 
Rogers,  J.  E.  T.,   19 
Roscwater,  V.  E.,  588 
Roussiers,    P.   de,   411 
Rowntree,  B.   S.,  80 
Russell,  H.  B.,  360 

Saving,  advantages  of,  yd;  illus- 
trations of,  130  fif;  motives  to, 
297  flf 

Savings  banks,  loans  of,  330;  im- 
portance of,  in  U.  S.,  343 

Say,  L.,  61 

Schaffle,  A.,  532 

Schloss,   D.,  531 

Schmoller,  G.,  61 

Schoenhof,   H.  J.,  243 

Scott,  W.  A.,  322,  360 

Seligman,  E.  R.  A.,  62,  540,  544, 
562 

Sellers,  calculations  of,  99 

Serfs,  3 

Shaler,  N.  S.,  45 

Shearman,  J.   G.,  532 

Silver,  in  U.  S.,  yj,  316  ff;  ques- 
tion in  U.  S.,  356  ff 

Single  Tax,  the  definition  of,  520; 
argument  of  Henry  George  for, 
520  f;  objections  to,  521  ff 

Situation,  importance  of,  to  land, 
116  f 

Slavery,   economic  basis   of,   22 

Smart,  W.,  61  f,  106 

Smith,  Adam,  theory  of  govern- 
ment of,  15,  62;  theory  of  pro- 
duction of,  107;  description  of 
pin-making  by.    142.  243 

Socialism,  definition  of,  524  f; 
plans  for  realisation  of.  524  f; 
advantages  claimed  for,  525  f; 
objections  to,  526  ff ;  of  Karl 
Marx,  530  f :  conclusions  touch- 
ing. 529,  531 

Societies,  friendly,  vs.  labour 
unions,  393 

Sociolog}',  its  relation  to  econom- 
ics. I 


South  Improvement  Company, 
freight  rates  paid  by  the, 
467 

Special  assessments,  definition  of, 
540 

Speculation,  the  economic  func- 
tion of.  175  f 

Spiers,   F.   W.,  453.  459 

Spinning,  inventions  affecting,    13 

Standard,  gold,  adoption  of,  in 
Europe,  310  f;  in  other  coun- 
tries. 311  f;  maintenance  of 
gold,  in  U.  S.,  314  ff;  future 
of    gold,    358    f;    the    multiple, 

359  f 

Standard  of  living,  differences  in, 
a  cause  of  differences  in  wages, 
234  ff;  not  rigid  in  U.  S.,  237 
f;  influence  of,  on  population. 
289  ff 

Standard  Oil  Company,  the.  or- 
ganisation of,  478;  dividends 
paid  by,  484  f 

Stanwood,  E.,  384 

Statistics,  definition  of,  57 

Statutes  of  Labourers,  7;  of  Ap- 
prentices, ID 

Steam-boat,  invention  of,   14 

Steam-engine,  invention  of,  13 

Steel,  in  U.  S.,  36;  manufactures 
of,  40  f 

Stephenson,   Robert,    14 

Stickney,  A.  B.,  475 

Stimson,  F.  J..  433 

Stock-watering,  to  conceal  profits, 
200 

Street  railway  business,  a  monop- 
oly, 448  ff;  profits  of.  in  U.  S, 

453  f 

Strike,  Anthracite  Coal,  cost  of 
the,  396  f;  Report  of  Commis- 
sion on  the,  396  ff 

Strikes,  evils  connected  with,  396 
ff 

Substitution,  power  of,  of  entre- 
preneurs, 171  ff;  of  consumers, 
191  f 


6i6 


Index 


Sugar  trust  (see  Trust) 
Sumner,  W.  G.,  62,  384;  Miss  H. 

L.,  411 
Supply,    influence    of,    on    prices, 

106 
Sweating    system,    description    of 

the,  423  f;   evils  of  the,  424  f; 

remedies     for     the,     in     Great 

Britain     and    U.     S.,     428;     in 

Australasia,  425  f 

Taff  Vale  case,  decision  in,  390 

Tarbell,   I.   M.,  509 

Tarifif,    U.    S.,    23    f;    history    of 

U.  S.,  371  ff;  u.  S.,  of  1897. 376 

f;  question  in  U.  S.,  378  fT; 
revenue  from  U.  S.,  563 ;  cost  of 
collecting  U.  S.,  564;  and  trusts, 
•380;  future  of  U.  S.,  381  f;  of 
United  Kingdom,  382 

Tarr,  R.  S.,  45 

Taussig,  F.  W.,  45.  62,  243,  282, 
360,  384 

Tax,  definition  of  a,  544  f;  the 
poll,  in  U.  S.,  548;  the  general 
property,  in  U.  S.,  548  ff,  564  ff, 
580,  582 ;  evasion  of  personal 
property,  in  U.  S.,  549  f;  the 
land,  550  ff,  578,  584  f;  the 
buildings,  554  f,  584  f;  a  mort- 
gage, 555 ;  the  specirJ  franchise, 
559/,  568,  578  f,  585  f;  the 
British  income,  572  f;  the  fed- 
eral income,  574  ff ;  the  real 
estate,  in  U.  S.,  584  f 

Taxation,  system  of,  of  N.  Y.,  567 
ff ;  and  distribution,  577  ff ; 
difficulties  in  way  of  reform  of, 
580  f 

Taxes,  an  expense  of  production, 
164;  principle  for  apportioning, 
545 ;  the  principal,  in  U.  S.,  546 
ff;  constitutional  provisions  re- 
specting, in  U.  S.,  546;  shifting 

J  and  incidence  of,  547  ff;  the 
capitalisation  of,  552,  559 ;  cor- 
poration,  555   ff,   567   f,   583    f; 


license,  560  f,  584,  586;  inherit- 
ance, 561  f,  568  fT,  580,  582  f; 
customs  and  internal  revenue, 
in  U.  S.,  563  f,  579  f;  state  in- 
come, in  U.  S.,  574;  conclusions 
as  to  income,  580 

Telephone  business,  a  monopoly, 
450  fif 

Texas,  annexation  of,  24;  public 
lands  of,  540 

Thompson,   H.   M.,  243 

Thompson,  R.  E.,  384 

Toynbee,   A.,  6r 

Trade,  balance  of,  11;  productive, 
107  f;  foreign  and  domestic, 
contrasted,  368;  foreign,  368  fif; 
advantages  of  free,  370  f;  free, 
definition  of,  382 

Trade  marks,  in  U.  S.,  441 

Trade  unions  (see  Unions,  la- 
bour) 

Trades,  dangerous,  the  regulation 
of,  in  Great  Britain,  427 

Trust,  sugar,  competition  against, 
192  f 

Trust  Companies,  loans  of,  330; 
growth  of,  in  U.  S.,  343 

Trust  Conference,  Report  of 
Chicago,   509 

Trusts,  in  connection  with  de- 
mand, 67 ;  definition  of,  476 ; 
motives  to  formation  of,  476  f; 
early,  in  U.  S.,  477  f ;  present, 
in  U.  S.,  478;  progress  of,  in 
U.  S.,  479  f ;  method  of  organ- 
ising, 480  ff;  profits  of  promot- 
ers of,  482  f;  ability  of,  to  con- 
trol prices,  486  f;  economies 
effected  by,  488  fif;  evils  charged 
against,  491  fif;  influence  of  the 
tarifif  on,  494  f;  obstacles  to 
legal  regulation  of,  in  U.  S.,  498 
f;  present  status  of,  in  U.  S., 
502  ff;  plan  for  securing  federal 
control  of,  504  fif;  the  future  of- 
in  U.  S.,  507  f 

Turner,  F.  J.,  45 


Index 


617 


Unionists,  labour,  right  of,  to 
strike,  391 

Unions,  labour,  purposes  of,  386 
f;  importance  of,  in  U.  S.,  387; 
in  United  Kingdom,  388 ;  law 
concerning,  in  United  Kingdom, 
388  flf;  in  U.  S.,  390  ff;  liability 
of,  for  damages  in  U.  S.,  391  f ; 
purpose  of  benefit  features  of, 
392  f ;  the  influence  of,  on 
wages,  404  fT ;  monopoly  powers 
of,  406  f;  laws  helpful  to,  407 
f;  educational  work  of,  408  f; 
as  schools  of  citizenship,  409; 
and  labour  laws,  409  f 

United  States,  area  of,  24 ;  de- 
scription of,  24  fT;  recent  addi- 
tions to,  26;  economic  inde- 
pendence of,  44;  monetary  sys- 
tem of,  313  flf,  321;  banking 
system  of,  338  flf 

United  States  Steel  Corporation, 
the,  capitalisation  of,  479;  mo- 
tives to  formation  of,  482  f; 
price  of  securities  of,  484 

Urdahl,   T.    K.,    588 

Utility,  definition  of,  48;  law  of 
diminishing,  63  f;  marginal, 
definition  of,  82 ;  relation  to 
value  of,  82  flf;  total,  85  f;  sur- 
plus, 87 

Value,  in  use,  49  flf;  in  exchange, 
49  flf;  two  senses  of,  81  ;  in  use 
to  Crusoe,  81  flf;  in  use  in  in- 
dustrial society,  88  flf;  complex, 
89  f;  of  complementary  goods, 
94  f;  and  price,  96;  of  money, 
97  f;  summary  of  theory  of, 
265 

Variety,  law  of,  67 

Villeins,  3 

Wages,  an  expense  of  produc- 
duction,  163  f;  profits  and.  185 
f;  definition  of,  222;  problems 
of,  222  f;  explanation  of  dififer- 


ences  in,  223  flf ;  resemblance  of, 
to   rent,    224;    relation   between 
marginal    and    higher,     227    f; 
other  reasons  for  diflferenccs  in, 
228  flf;  efificiency,  230;  influences 
perpetuating  diflferenccs  in,  234 
ff ;   restatement   of  law   of,   270 
f;  standard,  purpose  of,  393  flf; 
influence  on,   of  labour  unions, 
404   flf;    reasons   for   persistence 
of  low,  593  flf ;  probable  course 
of,   in   future,  601    f 
Wages  fund,  theory  of,  280  flf 
Wages  of  management,  definition 
of,     163     f ;     analysis     of,     169 
flf 
Wages  question,  outline  of,  55  f 
Wages  system  in  U.  S.,  22 
Walker,    F.    A.,   60,   62,    119,    136, 
154,  187,  221,  243,  322,  360;  F., 
588 
Wallace,  W.,  532 
Walsh,  C.  M.,  360 
Wants,    characteristics    of,    63    flf; 
indefinitely  numerous,  63  ;  vary- 
ing   intensities    of,    63;    social, 

65  f 
War,  Seven  Years',  12;  Civil,  22. 

27;  of  1812,  23 
Warner,   T..    19 
Water,    business    of    supplying,    a 

monopoly,  446  flf 
Watt,  James,    13 
Weaving,  invention  of  power,  14 
Webb,  B.,  411,  433;  S.,  411 
\\'eek-work.    3 
West,   M.,  588 
Wheat  in  U.   S.,   34 ;   dealings   in 

"  futures  "   in,    174  flf 
White,  H.,  322 
Whitney,  Eli,  32;  J.  D..  45 
Whitten,  R.  H.,  588 
Whittlesey,  S.  D.,  433 
Wicker,     C.     M.,    explanation    of 

discriminating  railway  rates  by, 

466 
Wieser,  F.  von,  61  f 


6i8  Index 

Willoughby,  W.  F.,  433  Workmen's  Compensation  Act,  in 

Wilson,   W.,  45  Great  Britain,  428  ff 

Wisconsin,     iniieritance  tax     of,       Worthington,  T.  K.,  588 

569  Wright.  C.  D.,  45 
Wool,     importance    of,  to    Eng- 
land, 7  ZoUverehi,  the  German,  382  f 


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